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

                                   FORM 10-K

<Table>
<C>          <S>
 (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



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                       COMMISSION FILE NUMBER: 000-27817
                             ---------------------
                              EDISON SCHOOLS INC.
             (Exact name of registrant as specified in its charter)

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

         521 FIFTH AVENUE, 11TH FLOOR                              10175
                 NEW YORK, NY                                    (Zip Code)
   (Address of principal executive offices)
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              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.
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                              EDISON SCHOOLS INC.

                           ANNUAL REPORT ON FORM 10-K
                    FOR THE FISCAL YEAR ENDED JUNE 30, 2001

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<S>       <C>                                                           <C>
                                   PART I
Item 1.   Business....................................................    4
Item 2.   Properties..................................................   22
Item 3.   Legal Proceedings...........................................   22
Item 4.   Submission of Matters to a Vote of Security Holders.........   23
          Executive Officers and Directors of the Registrant..........   23
                                  PART II
Item 5.   Market for Registrant's Common Equity and Related              26
          Stockholder Matters.........................................
Item 6.   Selected Financial Data.....................................   27
Item 7.   Management's Discussion and Analysis of Financial Condition    28
          and Results of Operations...................................
Item 7A   Quantitative and Qualitative Disclosures About Market          49
          Risk........................................................
Item 8.   Financial Statements and Supplementary Data.................   49
Item 9.   Changes in and Disagreements with Accountants on Accounting    49
          and Financial Disclosure....................................
                                  PART III
Item 10.  Directors and Executive Officers of the Registrant..........   50
Item 11.  Executive Compensation......................................   50
Item 12.  Security Ownership of Certain Beneficial Owners and            50
          Management..................................................
Item 13.  Certain Relationships and Related Transactions..............   50
                                  PART IV
Item 14.  Exhibits, Financial Statements and Reports on Form 8-K......   51
SIGNATURES............................................................   52
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     Some of the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" 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 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.

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                                     PART I

ITEM 1.  BUSINESS

     Edison is the nation's largest private operator of public schools serving
students from kindergarten through 12th grade. As reflected in the agendas of
both the Republican and Democratic parties, education is among the most
important domestic issues in the United States today. Directly addressing this
issue, 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. Over the course of three years of intensive
research, Edison's team of leading educators and scholars developed an
innovative, research-backed curriculum and school design. We opened our first
four schools in August 1995, and have grown rapidly in every subsequent year. In
the 2000-2001 school year, we served approximately 57,000 students in 113
schools located in 21 states across the country and the District of Columbia.
This represents an increase of 19,500 students and five new states from the
1999-2000 school year. For the 2000-2001 school year, approximately 41,000
students were enrolled in our schools in grades pre-K-5, approximately 13,000 in
grades 6-8 and approximately 3,000 in grades 9-12. In the 2001-2002 school year,
we expect to enroll approximately 75,000 students in 136 schools located in 22
states and the District of Columbia. Additionally, during the summer of 2001, we
served approximately 12,000 students in our summer school program. Our total
revenue has grown from $11.8 million in fiscal 1996 to $375.8 million in fiscal
2001. We attribute our growth in part to the demonstrated success of our
schools, as measured by significant improvements in student academic performance
and high levels of parental satisfaction. In July 2001 we acquired LearnNow,
Inc., a privately-held school management company. LearnNow operated seven
schools serving approximately 2,000 students in the 2000-2001 school year.

     Our model offers public school authorities, who face widespread concern
about disappointing student achievement, the benefits of a large private sector
company with national support systems. We believe those benefits include:

     - the ability to create, implement and support a superior educational model
       through focused research and development; and

     - increased emphasis on accountability for achieving improved academic
       performance.

     These benefits contribute to an enhanced educational experience that has
proven attractive to public school authorities, parents and teachers alike.
Elements of that experience include:

     - a rich and challenging curriculum based on clear standards and high
       expectations for all students;

     - a significantly longer school day and year;

     - an enriched technology program;

     - an emphasis on the professional growth of teachers through a commitment
       to training, an explicit career ladder and a school management structure
       that allows teachers to participate in the leadership of the school;

     - a support system focused on improving student achievement;

     - exposure to foreign language beginning in kindergarten; and

     - an emphasis on parental involvement and character development.

     We have an experienced and talented management team led by H. Christopher
Whittle, founder of several media enterprises, including the first national
electronic news system for middle and high schools in the United States, Benno
C. Schmidt, Jr., former President of Yale University, Christopher D. Cerf,
former Associate Counsel to President Clinton from 1994 to 1996, John E. Chubb,
senior fellow at the Brookings Institution and noted author and speaker on
education reform, and Reverend Floyd H. Flake, former member of the United
States House of Representatives. In addition, the management team includes 13
former public school system superintendents.

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INDUSTRY BACKGROUND

  OVERVIEW

     During the 1999-2000 school year, over 14,000 school districts comprising
in excess of 89,000 K-12 schools enrolled an estimated 46.9 million students. We
currently concentrate our business development efforts on the approximately
1,800 medium and large school districts that each have more than 5,000 students.
We estimate that these districts had annual operating budgets aggregating $190
billion for the 1998-1999 school year. Despite the growth in spending on public
education over the last decade, student achievement has progressed very little
and remains low. For example, on the National Assessment of Educational
Progress, only approximately 27% of students in grades 4 and 8 met grade level
standards in mathematics in 2000, the last year for which results are available.
In reading, only approximately 32% of students in grades 4 and 8 met grade level
standards in 1998, and only approximately 25% of students in grades 4 and 8 met
grade level standards in writing in 1998. The National Assessment of Educational
Progress, a testing program conducted by the U.S. Department of Education since
1970, uses tests specially designed to measure how well students meet grade
level standards established by a national panel of education experts. The tests
are administered to random national samples of students at three grade levels
every other year, or every fourth year, in major subjects.

     We recognize that there are many excellent public schools in the United
States. We also believe, however, that the overall performance of public schools
has been compromised by several inherent constraints under which they operate.
We believe that, taken together, these constraints inhibit many districts from
implementing a systemic program of improvement.

     - Lack of consistency in leadership.  We believe that an effective program
       for change requires both planning and a sustained commitment to effective
       implementation over a lengthy period of time. School districts are
       typically governed by school boards subject to regular elections and
       related turnover. The average term of urban school superintendents is
       less than three years. As a result of the relatively brief tenure of
       leadership, many public school systems have found it difficult to
       implement long-term approaches to improving student performance and
       school quality generally.

     - Inability to exploit the advantage of scale.  The over 14,000 school
       districts in the United States tend to be small, independent and
       localized operations. Only 2.5% of all school districts had annual
       operating budgets greater than $100 million for the 1996-1997 school
       year. This modest size can result in severe limitations on the ability
       both to develop and to implement substantial improvements in curriculum
       and school design. For example, in contrast to most large-scale private
       enterprises, the research and development budget in many districts is
       negligible. With the need to devote a significant portion of their
       resources to stand-alone administrative structures and the support staff
       to oversee curriculum for all subjects over 13 grade levels, many
       districts simply have nothing left for a long-term program of
       improvement.

     - Inability to invest for the future.  The time horizons of school
       districts necessarily are linked to the one-year appropriations cycle
       under which they usually operate. The ability to invest for the future by
       tolerating substantial short-term budget deficits is generally not
       feasible for school districts. For this reason as well, we believe change
       tends to be only incremental.

     In all three respects -- consistency of leadership, the benefits of scale
and the ability to make substantial investment for the future -- a large,
private sector company such as Edison is in a strong position to add substantial
value to public education.

  CURRENT REFORM INITIATIVES

     Public education is currently at the top of national, state and local
political agendas. President Bush and both major national political parties have
placed education at the center of their national platforms, and many state and
local authorities have enacted or encouraged measures to implement significant
educational reforms. Some of these reforms are programmatic innovations
occurring within public schools. Examples include expanded levels of teacher
training, higher standards, more rigorous testing and more effective

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technology. Other initiatives have sought to reform the public education system
itself by embracing the market-oriented concepts of competition, accountability
and a broader range of parental choice. These measures include legislation
authorizing charter schools, private management of public schools, voucher
programs and increased choice within existing systems.

     - Charter schools.  Since Minnesota first enacted legislation in 1991, 37
       states and the District of Columbia have passed charter school
       legislation. Under the typical charter school statute, identified
       entities, such as the state board of education or a state university, are
       authorized to grant a specified number of charters to community groups or
       non-profit entities to create a public school. A growing number of
       charter boards in turn contract with private sector organizations to
       operate the schools. In return for a large measure of autonomy from
       regulation, the charter school is accountable for student academic
       performance. Many charter school statutes limit the number of charter
       schools or the number of students that may enroll in charter schools.
       Currently, there are over 2,000 charter schools in operation, with an
       estimated enrollment of over 500,000 students in 34 states and the
       District of Columbia. This enrollment represents approximately 1.0% of
       the total student population in those 34 states and the District of
       Columbia.

     - Contract schools.  Contract schools are public schools operated by
       private organizations based upon management agreements with local school
       boards. Unlike charter schools, contract schools do not require specific
       statutory authority, but are created through a contract between a school
       management company and a school board in accordance with existing
       authority.

     - Voucher programs.  Voucher programs provide for the issuance to parents
       of tuition vouchers worth a certain amount of money that they can redeem
       at any approved school of their choice. These programs allow students to
       choose among public schools, which would have to compete for students, or
       possibly even attend private schools. Milwaukee has implemented a voucher
       program and Florida has adopted legislation authorizing such a program.
       Voucher legislation has also been introduced in several states. Private
       philanthropists have also made funds available for voucher programs.

     - Choices offered by school districts.  School districts are offering
       increased choice to their students by, for example, establishing magnet
       schools serving students within the district and allowing students to
       attend schools across district lines. Magnet schools are specialized
       public schools offering unique programs, such as curricula emphasizing
       math, science or the arts.

     - State takeover statutes.  Some states have exercised their ability under
       local law to divest local school boards of their authority to manage an
       identified school or schools within the district. These states include,
       among others, Maryland, New Jersey and Pennsylvania. One of those states,
       Maryland, has opted to contract with us to provide educational services
       at the identified schools. In addition, as a result of a program
       instituted under Pennsylvania's Educational Empowerment Act, we are
       managing a group of schools in Chester, Pennsylvania.

     Incorporating elements of both a market-oriented approach and programmatic
innovation, we are a leader in offering reform alternatives to local school
boards searching for new approaches to education. For the 2000-2001 school year,
we operated 71 contract schools with a total enrollment of 39,000 students and
42 charter schools with a total enrollment of 18,000 students. Of these contract
schools, 16 were operated under charters granted by school districts, which
provided the facilities. 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. The remaining 55
contract schools were operated under management agreements with local school
boards. We do not participate in voucher programs.

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THE EDISON SOLUTION

     As a private enterprise with national scale, Edison offers school districts
and charter boards a vehicle for overcoming many of the inherent constraints
that have impeded systemic reform of public schools. The Edison solution
consists of two equally critical and mutually reinforcing components:

     - a research-backed curriculum and school design that we believe yields
       significant improvement in student academic achievement as reflected in
       average annual gains of six percentage points against state
       criterion-referenced tests and five percentiles per year against national
       norm-referenced tests from the 1995-1996 school year through the
       2000-2001 school year; and

     - support systems designed to ensure consistent, replicable and effective
       implementation of our educational model as we expand into a wide range of
       communities across the nation.

Examples of the latter include a national teacher and principal recruiting
system; an infrastructure to support teacher training both before and after a
school opens; a national distribution network for curriculum materials,
technology equipment and supplies; and information systems to track and enhance
student progress against identified goals.

     We believe that many public school authorities are attracted to the Edison
solution because, unlike some other school reform initiatives, it enables them
to stimulate positive, market-oriented, comprehensive school reform within the
framework of the existing, locally controlled public school system. By entering
into a partnership with us, such authorities enjoy the resources, systems,
continuity of focus and commitment to ongoing research and development
associated with a national private sector company while at the same time
retaining local control of public education. For example, our management
agreements typically provide for the district or charter board to maintain
ultimate oversight and supervision over the school. In addition to regular
reporting requirements and the ability to terminate the management agreement on
performance grounds, such oversight may take several forms, including the right
to reject Edison's candidate for school principal and the right to make
adjustments to the curriculum.

  RESEARCH BEHIND THE EDISON SOLUTION

     The Edison school design and curriculum grew out of a comprehensive
three-year research project conducted by a team of approximately 30 full-time
professional employees and numerous outside experts under the leadership of
Benno C. Schmidt, Jr., the former President of Yale University. Our design team
included respected education researchers, curriculum developers, teachers,
principals, school administrators, writers, technology specialists and experts
in school finance and management. Together, they brought a wide range of
perspectives on improving education through the reform of curriculum,
instruction, assessment, professional development, school organization and most
other elements of education.

     The research leading to the development of our solution was extensive and
systematic; our staff members interviewed educators, reviewed a wide range of
school programs and attempted to assemble the best scientific evidence of the
effects of potential reforms in K-12 education. For example, our review of a
successful project in Indiana which placed computers in the homes of high-risk
students was instrumental in our decision to put computers in our students'
homes. Similarly, our investment in tutors resulted from our examination of
programs run by a Johns Hopkins University sociologist with a well-documented
record of developing basic skills with students who are at high risk for
academic failure.

  THE EDISON CURRICULUM AND SCHOOL DESIGN

     Our schools combine innovative curriculum and instruction methods with
structures to assess and guide students, hold school administrators accountable
for student performance and encourage and facilitate parental involvement in
their children's education.

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  CURRICULUM

     Demanding program of study.  Our curriculum is guided by detailed and
demanding student academic standards that specify what students should know and
be able to do at the end of each school year in twenty fields of study, from
reading, writing and mathematics to economics, geography, visual arts and
foreign languages. Our curriculum is also rich in content. For example, students
at the junior and high school levels study three years of world history and
literature and two years of U.S. history and literature. In addition, all high
school students have the opportunity to complete biology, chemistry and physics
by the end of 11th grade, and we offer a wide range of advanced placement
courses to students in the 11th and 12th grades.

     Professional development for teachers.  Our professional development
program provides opportunities for teachers to learn how to implement our
program and develop their skills as educators. We typically provide teachers
with four weeks of training before a school first opens and additional support
and training during the school's initial year. In addition, teachers generally
have two periods every day free for their own professional development, and our
school calendars provide at least five days for ongoing training each year. We
also offer more than a dozen national curriculum conferences annually for
different specialists within our schools.

     Proven instruction methods.  We use instruction methods derived from
systematic research. For example, our elementary schools implement Success for
All, a K-5 reading program developed at Johns Hopkins University and refined
through experimental studies directed by Johns Hopkins University over the last
ten years. Our schools generally use mathematics programs developed through
years of research by the University of Chicago School Mathematics Project.

     Emphasis on core values.  We believe schools cannot be successful unless
the students display certain values, such as the willingness to take
responsibility for themselves and their education, respect for teachers and
other students, and the desire to become educated. Our educational program is
built around a defined set of core values: wisdom, justice, courage, compassion,
hope, respect, responsibility and integrity. We believe these core values help
us promote strong character in our students and a positive learning environment.
Our students receive instruction in these core values at every grade level. For
example, students in our elementary schools read out loud and have group
discussions of morality stories written for children. Also, our teacher training
in student discipline, classroom management and instruction is based on a
character education program that incorporates these values.

     Regular assessments of student performance.  We routinely monitor our
students' progress against academic standards. We connect our standards and
instructional programs with state standards and assessments, and we believe our
students are well prepared for state and local tests, for which we are held
accountable. Each quarter teachers complete a unique report card, known as a
Quarterly Learning Contract, which is a special narrative report card that
tracks student progress against academic standards and sets specific goals for
students. We believe this is a contrast to the typical American report card that
grades progress relative to each teacher's subjective classroom standards.
Students also receive traditional letter grades in the Quarterly Learning
Contract. Our students take all standardized tests required by state and local
authorities. We have introduced a monthly benchmark assessment system that
provides us with detailed measurements of student progress toward achieving
grade level academic standards. We use these assessments to determine whether we
should adjust our instructional programs to help our students achieve the
academic requirements of their grade level.

     Extensive remedial instruction.  The Edison curriculum is designed to meet
the needs of all students, regardless of ability. We employ one-on-one tutoring
to help students master the academic requirements of their grade level.
Intensive remedial instruction in reading is available at all grade levels. In
addition, our longer school day and year provide more time for instruction.

     Support for students with special needs.  We instruct special education
students in mainstream classrooms, to the extent we believe it is responsible to
do so. However, special education staff are available at each site to provide a
full continuum of services, including additional support in regular classrooms,
resource rooms and self-contained environments for students with greater needs.
We offer students who have limited English proficiency
English-as-a-second-language programs or bilingual programs, depending on
community preference and needs.

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  SCHOOL DESIGN

     Students and teachers are organized into small
schools-within-a-school.  Each of our schools consists of small, flexible
schools-within-a-school, called academies, where teachers typically follow the
same students from grade to grade for several years. We believe this
organization ensures that students are better known by their teachers, helps
foster student-teacher relationships and encourages teachers to feel more
ongoing responsibility for individual students. Within each academy, students
are generally organized into multigrade groups, called houses, of 100 to 180
students each. Students typically remain within the same house until they
graduate from the particular academy. Each house is led by four to six teachers,
who usually work with students of every level of the house for the duration of
their academy experience and are responsible for the core academic program of
instruction in math, science, history, geography, civics, economics, reading and
language arts.

     Longer school day and year.  Our students are in school an average of 1,500
hours each year after the first year of their school's operation and our school
year is approximately 200 days. Based on these figures, we believe our students
spend more time in school each year than students in most other public schools.
This provides our students with substantially more time for learning than many
public school students and enables us to implement a richer curriculum. Our
school schedule also provides our students with less time during the shorter
summer vacation to forget what they learned during the school year.

     Increased integration of technology in the learning environment.  Our
schools are technologically rich environments aimed at preparing students for
the workplaces of the future. We generally provide each of our teachers with a
laptop computer and our classrooms generally have three computers as well as
printers for student use. We provide every family with a student above the
second grade a computer and a modem for use at home, following the first year of
their school's operation. To encourage and increase communication and enable the
sharing of best practices, teachers, students and parents are electronically
connected via The Common, our Internet-based, internal message, conferencing and
information system that connects all our schools. We have a distinctive program
called Technology as a Second Language to teach school staff, students and
families to use technology effectively.

     Immediate and comprehensive change.  For the schools we opened in the fall
of 2000, we made an average initial investment of approximately $2,500 per
student which we used to purchase computers and other technology, implement our
curriculum and train new teachers. We believe this provides an opportunity for
schools to launch a comprehensive package of change all at once. In contrast to
the small steps that school reform usually must take, our schools are able to
integrate new curriculum, technology and professional development and pursue
excellence in all areas immediately and aggressively.

     School-level accountability.  We hold each school accountable for a high
level of demonstrated student progress as measured by conventional standardized
tests, official performance assessments and our own assessments. Staff
compensation and promotions within our schools are generally linked to
performance. Parents of students in our schools are encouraged to share
accountability for their children's progress by co-signing the Quarterly
Learning Contract, under which they make a moral commitment to help their
children achieve specified academic goals. The Quarterly Learning Contract
serves as the report card for our students and indicates to parents how well
their children are performing relative to our annual academic standards. In
addition to educational accountability, our schools are also held accountable
for financial management and student, parent and community satisfaction.

     Principals accountable for school performance.  Principals at our schools
are appraised and compensated based on meeting student academic performance,
financial management and community satisfaction goals. They are also responsible
for public reporting of their school's accounts and budgets. Principals receive
school report cards that track progress on all accountability criteria, and
principals are in turn appraised and compensated based on progress against the
accountability criteria. Of the 12 principals that left Edison after the end of
the 2000-2001 school year, two were asked to leave, one resigned, three retired,
and six worked at schools that closed. In addition, five other principals were
promoted internally to new positions. Principals for our contract and charter
schools are chosen in consultation with the school district or charter board and
normally hired four to six months before the school opens. This allows our
operational vice presidents to work

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closely with the new principals for several months to thoroughly introduce them
to our education system. In addition, new principals receive two weeks of formal
training on our education system.

     Dedicated teachers.  We believe our schools attract motivated and dedicated
teachers due to the following factors:

     - our innovative curriculum and approach to education;

     - our commitment to professional development of teachers;

     - increased access to resources and technology; and

     - generally competitive salary levels.

     Our schools are staffed by four levels of teachers: lead teacher, senior
teacher, teacher and resident teacher. We believe this four-tier seniority
system provides an attractive career path and allows new teachers to be mentored
by more experienced teachers. Teachers are hired based on classroom and
educational experience, expertise in a particular subject area, evidence of
leadership abilities in the context of teams, and interaction with staff,
students and families. Lead teachers have responsibility for the organizational
management of the teaching team, and classroom instruction is the primary focus
of senior teachers, teachers and resident teachers. In addition, lead teachers
serve on the management team of the school, which is led by the principal and
also includes the business services manager. In this respect, teachers are
offered the opportunity to participate in the management of the school.

     Partnerships with families.  We are committed to keeping families engaged
in their children's education, both at school and in the home. We actively
encourage parental involvement in the education of their children through
interaction with teachers, involvement in school affairs and numerous volunteer
opportunities. We believe our program of providing, following the first year of
the school's operation, computers to the families of our students above the
second grade has increased parents' level of involvement in the school. In
addition, by co-signing the Quarterly Learning Contract, parents commit to
monitor the progress of their children in meeting stated educational goals.

     LearnNow Schools.  As a result of our acquisition in July 2001 of LearnNow,
Inc., a privately-held school management company, beginning in fiscal 2002 we
will operate 11 schools under the LearnNow brand. The instructional program of
LearnNow schools is consistent with the Edison program, particularly in the
areas we believe are the key factors for student success such as standards-based
curriculum and accountability. In addition, the LearnNow schools will take
advantage of most aspects of the Edison operating system. However, there are
some differences between the LearnNow schools and other Edison schools. For
example, LearnNow schools use a different curriculum for reading, focus on
expanded relationships with local community groups to address non-educational
needs of students and to provide positive role models, and make less extensive
use of technology and foreign language programs. We expect to continue to
operate the existing LearnNow schools under this model, but we do not currently
expect to add a significant number of new schools using the LearnNow brand or
program in the future.

  THE EDISON OPERATING SYSTEM

     The systems we have built to ensure consistent and effective
implementation, replicability and scalability are as essential to our model as
the Edison curriculum and school design itself. Although there are many
outstanding public schools in the United States, we believe that the basis for
such success has been highly individualized, often, for example, dependent on an
especially dynamic principal. Edison has designed its support systems with the
objective of not only creating excellence, but being able to replicate it in a
consistent manner in a widely diverse array of schools across the country.

     Operational Vice President structure.  Edison's fourteen operational vice
presidents, most of whom are former school superintendents or principals,
provide the most critical link between our central operations and each school
site. They are accountable for building and ensuring the operation of successful
schools, defined as schools that measurably enhance student achievement over
time and meet financial objectives. In meeting this responsibility, operational
vice presidents make frequent site visits, analyze school academic and financial
data, coordinate central support operations that meet the needs of each school
and hold regional training sessions for principals and teachers.
                                        10
<PAGE>   11

     Education and Curriculum Division.  Our Education and Curriculum Division
oversees the implementation, modification, support and effectiveness of our
educational design. The Education and Curriculum Division's 47 employees,
together with approximately 150 of our teachers who we annually certify as
trainers, provide a continuous stream of support to our schools through the
coordination of schoolwide and national training programs, development of
curricular standards and assessment of design effectiveness at each school. The
Education and Curriculum Division also collects, analyzes and publishes
educational data for use by our schools, our school district and charter board
clients and the public.

     Assessment.  The Assessment Department within our Education and Curriculum
Division monitors student achievement, school design and customer satisfaction
criteria of our schools, and analyzes these data to understand and measure our
schools' performance. This department also prepares monthly and annual reports
on school performance for our principals and operational vice presidents.

     Recruiting.  Strong educational leadership and teaching ability are vital
to the successful implementation of the Edison design. Our Recruitment
Department works year-round to attract outstanding principal candidates through
a variety of recruitment strategies, including direct headhunting, national
advertising and cultivation of outstanding internal candidates. The department
also recruits outstanding teacher candidates through a network of school-based
recruitment coordinators and through targeted recruitment efforts at over 100
college campuses, historically black colleges and highly regarded teacher
organizations.

     Real estate.  Prior to finalizing a management agreement, we typically
review the physical condition, technology infrastructure, suitability and
student capacity of each school site, and estimate the costs of preparing the
facilities for an Edison school. Once the management agreement is finalized, we
either contract with local architects and construction managers to make the
necessary modifications or work closely with client school districts, depending
on the terms of the management agreement. In some independent charter school
management agreements, we may be responsible for new construction, major
renovation or conversion of a commercial or industrial property. We often will
provide construction management and real estate development and financial
advisory services to charter schools. For more information on our real estate
arrangements, see "Properties."

     Start-up.  As a management agreement is finalized, the assigned operational
vice president sets up a local start-up office, hires a start-up staff, and
begins to complete each step outlined in our Start-up Manual, a multi-volume
guide that directs each phase of the start-up process. The start-up office
serves as the center for all school operations, including student enrollment,
staff recruitment and coordination with the central office.

     Purchasing.  Our Supply Chain Management Department is responsible for
coordinating both the purchase and the delivery of each school's curriculum and
technology. We believe our size and growth have allowed us to achieve economies
of scale by realizing more competitive prices from vendors than could most
school districts.

     Enrollment.  We provide technical expertise and on-site support to assist
each school in reaching its targeted enrollment. The Student Enrollment
Department supports a variety of student recruitment strategies, including
door-to-door distribution of recruitment literature, neighborhood information
sessions, posting of fliers in public areas, use of available print and
electronic media and interaction with community-based organizations. In the
event that the number of students seeking admission to an Edison school exceeds
the school's capacity, an open admissions lottery is held to determine which
students are admitted and which are placed on the school's waiting list.

     Business services.  We hire a business services manager to manage the
day-to-day administrative operations at each Edison school under the supervision
of the school's principal. Business services managers are responsible for
managing the school's budget, processing all site expenditures and coordinating
student transportation, food and personnel services at each Edison school. We
also employ twelve financial analysts in our central office to assess
prospective management contracts and monitor the budgets of our existing
schools. Our central office also monitors real estate financing and performs
traditional financial administrative functions.

     Technology.  Our Technology Department oversees the creation, modification,
and implementation of the technology components of the Edison curriculum and
school design. The department creates specifica-

                                        11
<PAGE>   12

tions for each school and start-up office, oversees technology-related building
modifications and equipment installation, recruits and selects, together with
the school principal, the school's technology director, trains the school's
technology director and provides additional field support as needed.

     Family and community partnerships.  Formal parent orientation begins once
the student body has been selected, but all parent meetings and community
information sessions that lead up to final student selection are part of
families' introduction to Edison and the contract or charter school. The parent
orientation process is organized at each site by the school's student support
manager, a professional member of the school staff who facilitates community
interaction and coordinates social services within the school. The student
support manager works closely with the school's principal throughout the
start-up process to recruit parent volunteers, hold welcome meetings, orient
parents to the Edison curriculum and school design and coordinate the school's
grand opening celebration.

     Pre-opening training.  We provide a comprehensive, pre-opening professional
development program for principals and teachers at each of our new sites. Our
national leadership training gives new principals an intense overview of the
Edison design, including the start-up process, curriculum, student academic
standards, school organization, school culture, technology, financial management
and measures of accountability. Training for all instructional school staff
takes place during the summer before the opening of the school and includes
training on instructional methodology, classroom management and the core
curriculum in each teacher's area of expertise.

     Ongoing training.  We maintain the successful operation of each of our
schools through frequent site visits by our support personnel and through
ongoing professional development for school staff. In addition to local
training, principals and teachers regularly convene for national conferences,
where training typically focuses on student achievement, leadership strategies,
design modifications, community relations, new support services or
subject-specific training sessions. Principals and teachers can also utilize The
Common, our on-line network, to access additional resources and interact with
individuals from other Edison schools.

     Site monitoring and accountability.  To ensure that each Edison school
makes continuous progress in each of these areas, we generate monthly school
operations reports for each school site. These reports include a compilation of
educational data generated at each school site, anecdotal observations from our
personnel who visited the school and information related to attendance,
enrollment, student and teacher mobility and technology usage. In addition to
the operations reports, we compile a year-end School Report Card for each school
site. The report includes information about student performance on standardized
tests; student performance on Edison's common performance assessments; levels of
parent, staff, and student satisfaction; and the degree to which the school met
its budgetary requirements. The School Report Card serves as the basis upon
which the school principal is evaluated and, where state law permits,
compensated.

THE EDISON SOLUTION IMPLEMENTED

     For the 2001-2002 school year, we are operating 136 schools in 53 cities
located in 22 states and the District of Columbia with a combined student
enrollment of approximately 75,000. This represents an increase of approximately
18,000 students and one new state from the 2000-2001 school year. We also
offered summer school programs at three of our schools and 37 non-Edison schools
in the summer of 2001.

     We operate two types of schools: contract and charter. In the case of most
charter schools, we are required to arrange for a facility. In some cases,
however, we operate charter schools under a charter granted by the local school
board, which provides the facility. In these cases, we categorize and count
these schools as contract schools because we do not provide the facilities and
therefore the economics of the arrangement more nearly resemble those of a
contract school. We believe that Edison, which is currently operating 83
contract schools, is the only major provider of contract schools for traditional
K-12 instruction in the United States.

     We consider grades pre-K-5, 6-8 and 9-12 to each be a school, and we count
grades pre-K-5, 6-8 and 9-12 as separate schools, even if they are located in
the same building. As we expand, we often introduce new grade levels gradually
rather than simultaneously opening all grade levels within a school. We consider
ourselves to have opened a new school if we introduce at least one grade level
at a different school level, for example, if we add grade 6 at a location
housing an existing pre-K-5 school. In some cases, we count grades
                                        12
<PAGE>   13

pre-K-6 as one school if it is the local practice to configure elementary
schools in this manner. For the 2001-2002 school year, we have 108 principals,
and each principal is generally responsible for all the Edison schools on his or
her campus. Our students have generally been from economically disadvantaged
backgrounds, and approximately 70% of our students participated in the federal
free and reduced lunch program during the 2000-2001 school year. These students
come from families with incomes at or below 185% of the poverty level
established by federal authorities.

     The following table provides information about the schools we are operating
for the 2001-2002 school year.

<Table>
<Caption>
                                                   NUMBER                                                   EARLIEST
                                                     OF        YEAR                  TYPE OF   SHORTEST    EXPIRATION
CLIENT                          LOCATION           SCHOOLS   COMMENCED    GRADES     SCHOOL      TERM         DATE
------                          --------           -------   ---------    ------     -------   --------    ----------
<S>                    <C>                         <C>       <C>         <C>        <C>        <C>        <C>
Chula Vista
  Elementary School
  District             Chula Vista, California         1       1997      K-5        Contract*   5 yrs        June 2002
Ravenswood City
  School District      East Palo Alto, California      2       1998      K-8        Contract*   5 yrs     January 2003
Fresno Unified School
  District             Fresno, California              1       1999      K-6        Contract*   5 yrs        June 2004
Long Beach Unified
  School District      Long Beach, California          1       2000      K-5        Contract    5 yrs        June 2005
Napa Unified School
  District             Napa, California                1       1998      K-6        Contract*   5 yrs        June 2003
San Francisco School
  District             San Francisco, California       1       1998      K-5        Contract*   5 yrs        June 2003
West Covina School
  District             West Covina, California         2       1998      K-8        Contract*   5 yrs        June 2003
Academy School
  District             Colorado Springs, Colorado      1       1998      K-5        Contract    5 yrs        June 2003
Colorado Springs
  School District      Colorado Springs, Colorado      2       1996      K-8        Contract*   5 yrs        June 2006
Wyatt-Edison Charter
  School               Denver, Colorado                2       1998      K-8        Charter     5 yrs        June 2003
Board of Area
  Cooperative Ed
  Services             Hamden, Connecticut             2       1998      K-8        Contract    5 yrs        June 2003
Friendship Public
  Charter School       Washington, D.C.                4       1998      K-11       Charter     5 yrs        June 2003
Community Academy
  Public Charter
  School               Washington, D.C.                2       2000      pre-K-8    Charter     3 yrs        June 2003
Southeast Academy of
  Scholastic
  Excellence Public
  Charter School       Washington, D.C.                2       2000      K-8        Charter     5 yrs        June 2005
Thomas A. Edison
  Charter School of
  Wilmington           Wilmington, Delaware            2       2000      K-7        Charter     5 yrs        June 2005
Dade County Public
  Schools              Miami, Florida                  1       1996      K-5        Contract    5 yrs        June 2006
Drew Charter School    Atlanta, Georgia                1       2000      K-5        Charter     5 yrs        June 2005
Bibb County School
  District             Macon, Georgia                  2       1999      K-6        Contract    5 yrs        June 2004
Chicago Charter
  School Foundation    Chicago, Illinois               3       1999      K-12       Charter     8 yrs        June 2007
Peoria Public Schools  Peoria, Illinois                4       1999      K-8        Contract    5 yrs        June 2004
Springfield Public
  Schools              Springfield, Illinois           1       2000      K-5        Contract    5 yrs        June 2005
</Table>

<Table>
<S>                    <C>                         <C>       <C>         <C>        <C>        <C>        <C>
                                                                                     (continued on the following page)
</Table>

                                        13
<PAGE>   14

<Table>
<Caption>
                                                   NUMBER                                                   EARLIEST
                                                     OF        YEAR                  TYPE OF   SHORTEST    EXPIRATION
CLIENT                          LOCATION           SCHOOLS   COMMENCED    GRADES     SCHOOL      TERM         DATE
------                          --------           -------   ---------    ------     -------   --------    ----------
<S>                    <C>                         <C>       <C>         <C>        <C>        <C>        <C>
Davenport Community
  School District      Davenport, Iowa                 1       1999      K-5        Contract    5 yrs        June 2004
Wichita School
  District No. 259     Wichita, Kansas                 4       1995      K-8        Contract    5 yrs        June 2005
New Baltimore City
  Board of School
  Commissioners and
  the Maryland State
  Department of
  Education            Baltimore, Maryland             3       2000      pre-K-5    Contract    5 yrs        June 2005
Boston Renaissance
  Charter School       Boston, Massachusetts           2       1995      pre-K-8    Charter     5 yrs        June 2005
Seven Hills Charter
  School               Worcester, Massachusetts        2       1996      K-8        Charter     5 yrs        June 2006
Battle Creek School
  District             Battle Creek, Michigan          3       1998      K-8        Contract    5 yrs        June 2003
Detroit Academy of
  Arts and Sciences    Detroit, Michigan               3       1997      K-10       Charter     5 yrs        June 2006
Detroit Public School
  Academy              Detroit, Michigan               2       1998      K-8        Charter     3 yrs        June 2001
YMCA Service Learning
  Academy              Detroit, Michigan               2       1999      K-8        Charter     5 yrs        June 2004
Edison Oakland Public
  School Academy       Ferndale, Michigan              2       1999      K-8        Charter     5 yrs        June 2004
Flint School District  Flint, Michigan                 4       1997      K-12       Contract    5 yrs        June 2002
Inkster Public
  Schools              Inkster, Michigan               4       2000      pre-K-12   Contract    5 yrs        June 2005
Mt. Clemens School
  District             Mt. Clemens, Michigan           4       1995      K-12       Contract    5 yrs        June 2003
Board of Education of
  Pontiac              Pontiac, Michigan               2       1998      K-8        Contract    5 yrs        June 2003
Duluth Public Schools  Duluth, Minnesota               3       1997      K-9        Contract*   3 yrs        June 2003
Minneapolis School
  District No. 1       Minneapolis, Minnesota          2       1998      K-8        Contract    5 yrs        June 2003
Hope Community
  Academy              St. Paul, Minnesota             1       2000      K-4        Charter     3 yrs        June 2003
Minnesota Institute
  of Technology        St. Paul, Minnesota             1       2000      K-6        Charter     3 yrs        June 2003
Kansas City Municipal
  School District      Kansas City, Missouri           1       1999      K-5        Contract    5 yrs        June 2004
Westport Allen-
  Edison Village
  Educational School   Kansas City, Missouri           2       1999      K-8        Charter     5 yrs        June 2004
Westport Community
  Secondary Schools    Kansas City, Missouri           2       1999      6-12       Contract*   5 yrs        June 2004
Schomburg Charter
  School, Inc.         Jersey City, New Jersey         1       2000      K-5        Charter     2 yrs        June 2002
Granville Public
  Charter School       Trenton, New Jersey             3       1998      K-11       Charter     2 yrs        June 2002
New Covenant Charter
  School               Albany, New York                1       2000      K-6        Charter     4 yrs        June 2004
</Table>

<Table>
<S>                    <C>                         <C>       <C>         <C>        <C>        <C>        <C>
                                                                                     (continued on the following page)
</Table>

                                        14
<PAGE>   15

<Table>
<Caption>
                                                   NUMBER                                                   EARLIEST
                                                     OF        YEAR                  TYPE OF   SHORTEST    EXPIRATION
CLIENT                          LOCATION           SCHOOLS   COMMENCED    GRADES     SCHOOL      TERM         DATE
------                          --------           -------   ---------    ------     -------   --------    ----------
<S>                    <C>                         <C>       <C>         <C>        <C>        <C>        <C>
Harriet Tubman
  Charter School       Bronx, New York                 1       2001      K-3        Charter     5 yrs        June 2005
Stepping Stone
  Academy Charter
  School               Buffalo, New York               1       2001      K-5        Charter     5 yrs        June 2006
Riverhead Charter
  School               Riverhead, New York             1       2001      K-4        Charter     5 yrs        June 2006
Charter School of
  Science and
  Technology           Rochester, New York             2       2000      K-8        Charter     5 yrs        June 2005
Charter School For
  Applied
  Technologies         Tonawanda, New York             1       2001      K-6        Charter     5 yrs        June 2006
Clark County School
  District             Las Vegas, Nevada               7       2001      K-8        Contract    5 yrs        June 2006
Nash-Rocky Mount
  Public Schools       Whitakers, North Carolina       1       1999      K-5        Contract    5 yrs        June 2004
Alliance Community
  Schools, Inc.        Dayton, Ohio                    3       1999      K-6        Charter     5 yrs        June 2004
Chester-Upland School
  District             Chester, Pennsylvania           9       2001      K-12       Contract    5 yrs        June 2006
Mariana Barcetti
  Academy Charter
  School               Philadelphia, Pennsylvania      1       2000      6-9        Charter     5 yrs        June 2006
Renaissance
  Academy-Edison
  Charter School       Phoenixville, Pennsylvania      2       2000      K-8        Charter     5 yrs        June 2005
Lincoln-Edison
  Charter School       York, Pennsylvania              1       2000      K-5        Contract*   5 yrs        June 2005
Dallas Independent
  School District      Dallas, Texas                   7       2000      pre-K-6    Contract    5 yrs        June 2005
Southwest School
  District             San Antonio, Texas              2       1997      K-5        Contract    5 yrs        June 2002
Tyler Independent
  School District      Tyler, Texas                    1       1999      6-8        Contract    5 yrs        June 2006
Milwaukee Science
  Education
  Consortium           Milwaukee, Wisconsin            2       2000      pre-K-7    Charter     5 yrs        June 2005
Milwaukee Urban
  League Academy of
  Business and
  Economics, Inc.      Milwaukee, Wisconsin            1       2001      K-5        Charter     5 yrs        June 2006
                                                     ---
    Total                                            136
                                                     ===
</Table>

---------------

* Indicates charter schools operated under a charter granted by the local school
  board.

     We closed three schools at the end of the 2000-2001 school year that were
operated in facilities shared with our clients' traditional school programs, an
operating model that we are discontinuing, although we continue operating
schools for these clients. In addition, four schools closed at the end of the
2000-2001 school year due to the termination of the two underlying management
agreements. The seven closed schools enrolled approximately 2,400 students in
the aggregate.

GROWTH STRATEGY

     We believe the approximately 1,800 medium and large independent school
districts nationwide, which we estimate collectively had operating budgets of
$190 billion in the 1998-1999 school year, represent a significant growth
opportunity. Our strategy is to grow within this market through the expansion of
relationships with existing clients as well as the establishment of new
relationships.

                                        15
<PAGE>   16

     Our marketing efforts will continue to focus on our ability to replicate
the success achieved at other Edison schools throughout the country. In recent
years, we have begun to shift our focus to school districts where we can offer a
cluster of schools in the first year of the contract. Clusters offer enhanced
economies of scales at both the school and central office level. We believe that
effective marketing and communication efforts targeted at administrators,
teachers and parents will yield higher levels of perceived benefits among these
constituencies and ultimately generate increased penetration within our market
of K-12 schools.

     We believe that uninterrupted access to the Edison system from kindergarten
through high school will achieve the most favorable outcome for students.
Historically, our management agreements have provided for the establishment of
one or more elementary schools during the first contract year. Through our
development efforts, we seek to expand upon the initial contract by opening
additional schools within the district in subsequent years. We believe that our
strong academic results will encourage school districts and charter holders to
retain us to operate multiple schools. In addition, we believe that satisfied
parents will push to make our schools available for their children's entire K-12
education. Twenty-four of our first 40 clients have added one or more additional
schools.

COMPETITIVE STRENGTHS

     We believe that the following factors will contribute to our continued
success and future growth:

     - Quantifiable academic improvement.  Student achievement in our schools
       has been substantial, as measured by a range of state and local tests.
       From the 1995-1996 school year through the 2000-2001 school year, for
       those schools that we have operated long enough to generate trend data,
       our students, on average, gained six percentage points per year against
       state criterion-referenced tests and five percentiles per year against
       national norm-referenced tests.

     - Parental satisfaction.  Our schools enjoy high parental satisfaction.
       According to a survey prepared for us by an independent market research
       firm for the 2000-2001 school year, covering all of our schools then in
       operation, over 50% of the parents of our students gave our schools
       grades of A or A-. This compares to 40.3% of parents who gave on average
       a grade of A or A- in a sample of U.S. public schools for the 1999-2001
       school years, according to the same market research firm.

     - Extensive infrastructure.  We have a series of systems and support staff
       that permit us to implement our curriculum and school design in contract
       and charter schools in communities across the United States. The systems
       have been used successfully during our past five years of rapid
       expansion. These systems include recruiting capabilities, assessment
       mechanisms, professional development systems, financial management and
       acquisition systems, and systems to assess prospective management
       agreements.

     - Advantages of scale.  We expect to achieve advantages of scale as more
       schools are added to our school systems, allowing us to increase our
       purchasing power and reduce our overhead costs as a percentage of total
       revenue. We are also focused on achieving clustering efficiencies by
       opening multiple schools in a district. By focusing on expanding
       operations in existing markets, we believe we can better capitalize on
       our relationships with the district, our knowledge of the specific market
       and economies of scale in the provision of centralized services.

     - Experienced management team.  We have an experienced management team led
       by H. Christopher Whittle, founder of several media enterprises including
       the first national electronic news system for middle and high schools in
       the United States, Benno C. Schmidt, Jr., former President of Yale
       University, Christopher D. Cerf, former Associate Counsel to President
       Clinton from 1994 to 1996,

                                        16
<PAGE>   17

John E. Chubb, senior fellow at the Brookings Institution and a noted author and
speaker on education, and Reverend Floyd H. Flake, former member of the United
States House of Representatives. Our management team also has 13 former school
      system superintendents, including Deborah M. McGriff, former
      superintendent of the Detroit public schools, and Manuel Rivera, former
      superintendent of the Rochester public schools.

     - Significant investment in research and development.  Prior to opening our
       first four schools during the 1995-1996 school year, we conducted a
       three-year research project led by a core team of educators, researchers,
       policy experts and other professionals to create an innovative and, we
       believe, effective model for operating more efficient and effective
       public schools. This research project led to the creation of Edison's
       curriculum and school design, which integrate many successful educational
       practices into a comprehensive school solution for grades K-12, guided by
       high academic standards, supported by research-backed innovations in most
       areas of schooling and emphasizing assessment and accountability. In
       addition, our Education and Curriculum Division regularly assesses the
       effectiveness of our educational design and oversees its modification and
       improvement.

ACADEMIC PERFORMANCE

     School districts and charter boards generally retain us both to improve the
academic performance of the students who will be in our schools and to create
competition, which they hope will stimulate academic progress in the other
schools in the district. Our students are required to take the same local, state
and national tests administered by other public schools in the district. States
regularly require students to take assessments based on state standards, known
as criterion-referenced tests, and school districts also typically require
students to take tests based on national standards, known as national
norm-referenced tests. Both types of tests are scored by independent authorities
and result in publicly available data about student performance.

     Student academic achievement in our schools has been substantial, as
measured by these external assessments. The following summarizes available
results for schools that were open during the 2000-2001 school year:

     - On criterion-referenced tests -- tests that gauge the ability of students
       to achieve specified standards, and increasingly the type of test being
       used by the states to hold schools accountable -- Edison schools have,
       from 1995 to 2001, increased the percentage of students achieving
       standards by an average of six percentage points every year.

     - On norm-referenced tests -- tests that gauge the achievement of students
       relative to their peers nationwide -- Edison schools have, from 1995 to
       2001, increased the national percentile rank of students by an average of
       five percentiles every year.

     - In the 2000-2001 school year, Edison schools improved on their historical
       rate of gain. On criterion-referenced tests -- the most common tests in
       Edison schools -- the average gain was seven percentage points, one point
       higher than the average gain from 1995 to 2001. On norm-referenced
       tests -- the accountability measure in roughly a third of Edison
       schools -- the rate of gain held steady at five percentiles.

     - Edison schools not only have a strong record of helping more students
       each year achieve state standards; they have sharply reduced the numbers
       of students failing state tests altogether. From 1995 to 2001, Edison
       schools reduced the failure rate on criterion-referenced tests an average
       of six percentage points per year. In the 2000-2001 school year, Edison
       schools reduced failure rates an average of nine percentage points per
       school.

     The results described above do not include results for schools operated by
LearnNow during the 2000-2001 school year.

                                        17
<PAGE>   18

FUTURE OPPORTUNITIES

     We intend to selectively pursue opportunities created by state-sponsored
school and school district take-overs and other opportunities for whole-district
management. In addition, we believe our success in operating K-12 public schools
will allow us to expand into complementary areas of the education industry.
Concepts under consideration include:

     - establishing teacher training schools, which we refer to as Edison
       Teacher's Colleges; and

     - configuring our curriculum, school design and systems for license to
       small school districts.

LABOR RELATIONS

     We are committed to developing a positive relationship with teachers'
unions at both the local and national levels. We work in successful partnership
with local teachers' unions in numerous schools across the country, and believe
our distinctive curriculum and school design can be successfully delivered in
the context of a unionized school. In this regard, we believe we are unique
among school management companies, which generally have declined to operate in
schools subject to collective bargaining.

     Our commitment to developing a successful working relationship with unions
reflects the fact that a majority of our schools are contract rather than
charter schools. As a general proposition, teachers at charter schools in the
United States are not represented by unions. In contrast, at least in those
states with strong public employee labor laws, school teachers in traditional
public schools generally have elected to organize. Approximately 40% of the
schools we are operating for the 2001-2002 school year are being operated under
collective bargaining agreements as modified by a memorandum of understanding.
In some charter schools, the charter incorporates by reference portions of
collective bargaining agreements.

     Although we prefer positive union relations, we regularly encounter
resistance from teachers unions in local school board debates over whether to
enter into a management agreement with us. Local teachers' unions have also
occasionally initiated litigation challenging our management agreements. The
concept of a private sector school manager in public education is a
comparatively new one. In addition, both national teachers unions historically
have opposed privatization in public schools. While we reject that label and
regard our approach to be more of a public/private partnership that draws on the
strengths of both sectors, the unions' historical perspective often influences
local debates. In many instances, we have pursued a charter in a community only
after it became clear that the local teachers association would decline to
participate in discussions concerning our retention by the district to operate a
contract school.

     For several reasons, we believe that our relations with unions at all
levels will continue to improve:

     - as an organization, we are committed to that improvement;

     - many union members recognize that we are the only significant private
       sector organization in this area that seeks to work within the existing
       public school system;

     - notwithstanding the perception of some opinion leaders, significant
       elements within teachers unions are committed to meaningful reforms,
       including any initiative that improves student performance, preserves the
       integrity of the public school system as a whole and protects the rights
       of teachers as professionals. We believe that our approach, unlike many
       other reform initiatives, is consistent with these objectives;

     - we believe that some local union leaders have concluded that working with
       us is an effective defensive strategy against other more threatening
       initiatives, such as vouchers or non-unionized charters; and

     - many aspects of our curriculum and school design, such as extensive
       professional development and an enhanced leadership role for teachers in
       the management of the school, have long enjoyed the support of the
       unions.

     We typically have employment agreements with the principals, union and
non-union teachers and other personnel of our schools.

                                        18
<PAGE>   19

BUSINESS DEVELOPMENT

     Our development division is responsible for establishing new client
relationships, expanding relationships with current clients and renewing client
management agreements. The division consists of seven teams of two to three
development professionals, each team responsible for a particular group of
target accounts. The development cycle for contract and charter schools usually
begins 10 to 20 months prior to a school's opening. The development vice
president typically targets numerous school districts within his or her region
as potential clients for a contract school, based upon a variety of criteria,
including:

     - total enrollment and per-pupil expenditures of the district;

     - proximity to existing Edison schools;

     - perceived district and teacher's union support;

     - the school superintendent's perceived receptivity to innovation; and

     - number of new public or private schools opening in the district.

The development vice president's decision to focus on an area for a potential
charter school is based on similar factors, as well as other criteria,
including:

     - particulars of the applicable state charter legislation;

     - an established non-profit community agency interested in holding the
       charter;

     - a viable site acquisition strategy; and

     - the support of state and local officials for charter schools.

The development cycle for contract and charter schools usually involves numerous
presentations to school district governing boards, teachers, teachers' union
leaders, parents, community groups and the media, as well as visits to our
existing contract or charter schools.

CONTRACTUAL ARRANGEMENTS FOR ESTABLISHING CONTRACT AND CHARTER SCHOOLS

     Contract schools.  Our management agreements for operating contract schools
are typically negotiated with the district school board. Management agreements
generally last for five years, provide us with per-student funding generally
comparable to that received by other schools in the district and give us
substantial control over a school, under the board's ultimate supervision. We
deliver and support our curriculum, manage the school's budget, provide periodic
assessment reports to the school district, hire teachers and, in collaboration
with the school district, choose the school's principal.

     Charter schools.  Our management agreements for operating charter schools
are negotiated with the charter boards, which generally consist of community
groups or established non-profit entities. Public school districts typically can
also issue charters and may retain us to operate charter schools. The terms and
conditions of these management agreements are similar to our management
agreements for contract schools. We often also help the charter boards arrange
for financing to obtain the facilities for the charter schools and often provide
interim financing. In some cases, we have entered into long-term leases for the
charter school facilities. We have also provided permanent credit support for
many of our charter school buildings, typically in the form of loan guarantees
or cash collateral.

GOVERNMENT LAWS AND REGULATIONS

     Federal and state education programs.  We receive funds derived from
numerous federal and state programs to be used for specific educational
purposes. If we fail to comply with the requirements of the various programs, we
could be required to repay the funds and be determined ineligible for receipt of
future federal

                                        19
<PAGE>   20

funds. Most of our schools receive funds under Title I of the Elementary and
Secondary Education Act of 1965. This program supports educationally
disadvantaged children in areas of high poverty. Some of our schools also
receive funds from other programs under this act, including Title II, which
provides funding for the professional development of teachers, Title III, which
provides funding for technology programs, Title VII, which provides funding for
bilingual education programs, and Title X, which provides start-up funding for
charter schools. We have policies and procedures in place in order to comply
with the regulations and requirements of these programs.

     Although we receive these federal and state funds indirectly, through local
school boards and charter boards, our receipt of these funds subjects us to
extensive governmental regulation and scrutiny. We could lose all or part of
these funds if we fail to comply with the applicable statutes or regulations, if
the federal or state authorities reduce the funding for the programs or if we
are determined to be ineligible to receive funds under such programs. To the
extent that the laws and regulations governing federal and state programs change
or are interpreted in a manner that would prevent school districts and public
charter schools from using federal funds to pay for the services we provide, the
loss of all or part of these funds would hurt our business.

     Individuals with Disabilities in Education Act.  This act requires that
students with qualified disabilities receive an appropriate education through
special education and related services provided in a manner reasonably
calculated to enable the child to receive educational benefit in the least
restrictive environment. Our responsibility to provide the potentially extensive
services required by this act varies depending on state law, type of school and
the terms of our management agreements. We are generally responsible for
ensuring the requirements of this act are met in our charter schools, unless
state law assigns that responsibility to another entity. School districts are
generally responsible for ensuring the requirements of this act are met in our
contract schools. We could be required to provide additional teachers, aides,
special services or a placement in a private school, at our cost, if we are
found in violation of this act in one of our schools.

     Family Educational Rights and Privacy Act.  We are subject to the federal
Family Educational Rights and Privacy Act, which protects the privacy of a
student's educational record, and generally prohibits a school from disclosing a
student's records to a third party without the student's prior consent. The law
also gives parents certain rights with respect to their minor children's
education records. Our failure to comply with this law may result in termination
of our eligibility to receive federal education funds.

     Gun-Free Schools Act.  The Gun-Free Schools Act, which became effective in
1994, requires us to effect certain policies, assurances and reports regarding
the discipline of students who bring weapons to our schools. If we violate any
of these requirements, we may be deemed ineligible to receive certain Federal
education funds.

     Federal Civil Rights Laws.  We must comply with federal civil rights laws
or we could be determined ineligible to receive funds from federal programs or
face criminal or civil penalties. These laws include the following:

     - Title VI of the Civil Rights Act of 1964.  Title VI prohibits recipients
       of federal financial assistance from discriminating on the basis of race,
       color or national origin.

     - Title IX of the Education Amendments of 1972.  Title IX prohibits
       discrimination on the basis of gender by recipients of federal financial
       assistance.

     - Section 504 of the Rehabilitation Act of 1973.  Section 504 prohibits
       discrimination on the basis of disability by recipients of federal
       financial assistance.

     - Americans with Disabilities Act of 1990.  This act prohibits
       discrimination in employment against a qualified individual with a
       disability and requires that buildings, facilities and vehicles
       associated with public services be accessible to individuals with
       disabilities.

     - Age Discrimination Act of 1975.  This act prohibits recipients of federal
       financial assistance from discriminating on the basis of age.

                                        20
<PAGE>   21

     - Age Discrimination in Employment Act of 1967.  This act prohibits
       discrimination on the basis of age in employment.

     - Equal Pay Act of 1963.  This act prohibits discrimination on the basis of
       gender in the payment of wages.

     - Title VII of the Civil Rights Act of 1964.  Title VII prohibits
       discrimination on the basis of gender in employment.

     Drug-Free Workplace Act of 1988.  The Drug-Free Workplace Act requires a
recipient of federal funds to certify that it provides a drug-free workplace. If
we violate the certification and reporting requirements of this act, then we
could be determined ineligible to receive federal funds.

     State regulations.  We are also subject to state statutory and regulatory
requirements in the states in which we operate. All states have standards for
the operation of schools concerning, for example, the length of the school year,
curriculum, hours of the school day, physical education and other areas. We
could be in violation of our management agreements with charter boards or school
districts if we fail to comply with these standards.

     For more information on the effect of government laws and regulations on
our business, see "Management's Discussion and Analysis of Financial Conditions
and Results of Operations -- Additional Risk Factors That May Affect Future
Results -- 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" and "-- 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."

SECURITY

     We believe our school design helps maintain order and security by
encouraging closer relationships between teachers, students and families. In
addition, we recently began to implement the following three-step program for
ensuring security at our schools:

     - first, we have engaged a national school security consultant to oversee
       the design and effectiveness of security at our schools;

     - second, we have convened a security committee, consisting of school
       administrators, superintendents and security experts, and developed
       detailed security procedures and standards for all Edison schools; and

     - third, we are including a security training module as part of the
       leadership training for all principals.

HUMAN RESOURCES

     As of June 30, 2001, we had 282 full-time headquarters employees. In
addition, 87 principals, approximately 3,000 teachers and approximately 1,500
members of administrative staff and management worked in our schools for the
2000-2001 school year.

COMPETITION

     We have few direct competitors. We believe the companies that are most
similar to us in terms of corporate strategy focus primarily or exclusively on
operating charter schools, rather than contracting with school districts. These
companies include Beacon Education Management, Charter Schools USA, The Leona
Group, Mosaica Education, Inc., National Heritage Academy and SABIS Educational
Systems. In addition, other private school operators, post-secondary education
providers or child care providers could possibly enter our market. For example,
Bright Horizons Family Solutions, a provider of corporate sponsored child care,
recently opened its first private school, and it or other child care providers
could seek opportunities in the charter or contract schools market. KIPP
Academy, Inc., which is a non-profit corporation, operates a number of charter
schools.

                                        21
<PAGE>   22

ITEM 2.  PROPERTIES

     Of the 136 schools we are currently operating in fiscal 2002, the 83
contract schools generally operate in existing facilities provided by our school
district clients, though we manage the maintenance and operation of these
facilities. Of our 83 contract schools, 15 are operated under a charter held by
a public school district which provides a facility.

     Significant real estate investments are often necessary when we establish a
charter school for a charter board and existing facilities are not available.
Generally, these investments are either made by the charter board or by us, and
we work closely with the charter board to locate, develop and finance the
charter school's facilities. A suitable location often needs to be found prior
to completing a charter application for a particular jurisdiction. The building
or renovation process generally lasts at least several months and can vary
widely in expense from minimal upgrades to new construction, which typically
costs from $4.0 million to $8.0 million. Innovative financing methods are often
needed to compensate for the limited amount of state and local funding available
to develop charter school facilities and we have employed a variety of
approaches, including owning or leasing the building, advancing funds for the
building to the charter board with various repayment terms, or having the
charter board directly own or lease the facility, 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.

     In July 2000, we acquired a 35% interest in Ksixteen LLC, a company
organized to provide construction management and real estate development and
financial advisory services to charter schools. The management of Ksixteen
included all the members of our former real estate department. Edison and
Ksixteen entered into a master development agreement pursuant to which Ksixteen
performed construction management and real estate development and financing
services on behalf of charter schools that have entered into management
agreements with us. Effective July 1, 2001, we acquired the remaining 65% of
Ksixteen and intend to operate our real estate function internally in the
future.

     Our executive offices are located in New York, New York in a leased
facility consisting of approximately 62,500 square feet.

     We have purchased property in New York, New York for the purchase price of
$10 million and we have entered into an agreement with the Museum of African Art
to develop the property for a mixed use project consisting of 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, we may choose to sell the
property, potentially at a loss.

ITEM 3.  LEGAL PROCEEDINGS

     We are involved in various legal proceedings from time to time incidental
to the conduct of our business. For example, we are currently involved in
lawsuits filed in Dallas, Texas, Baltimore, Maryland, Peoria, Illinois and Las
Vegas, Nevada questioning the authority of these school districts to enter into
management agreements with us. In addition, the school district of York,
Pennsylvania has appealed the decision of the state charter-granting authority
to grant a charter to one of our clients. We currently believe that any ultimate
liability arising out of such proceedings will not have a material adverse
effect on our financial condition or results of operations.

                                        22
<PAGE>   23

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of our stockholders during the fourth
quarter of 2001.

EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

     Our executive officers and directors, and their ages as of September 17,
2001, are as follows:

<Table>
<Caption>
NAME                                                   AGE                   POSITION
----                                                   ---                   --------
<S>                                                    <C>   <C>
H. Christopher Whittle...............................  54    President, Chief Executive Officer and
                                                             Director
Benno C. Schmidt, Jr. ...............................  59    Chairman of the Board of Directors
Christopher D. Cerf..................................  46    Chief Operating Officer and Director
Adam Feild...........................................  34    Chief Financial Officer and Executive
                                                             Vice President
John E. Chubb, Ph.D. ................................  47    Chief Education Officer and Executive
                                                             Vice President
Laura K. Eshbaugh....................................  53    Executive Vice President
Reverend Floyd H. Flake..............................  56    President of Edison Charter Schools and
                                                             Director
David A. Graff.......................................  34    General Counsel and Senior Vice
                                                             President
Kathleen M. Hamel....................................  37    Executive Vice President, Whole District
                                                             Partnerships
Tonya G. Hinch.......................................  38    Executive Vice President, School
                                                             Operations Division
Deborah M. McGriff, Ph.D. ...........................  52    President of Edison Teacher's Colleges
Donald N. Sunderland.................................  51    Chief Information Officer and Executive
                                                             Vice President
Joan Ganz Cooney.....................................  71    Director
Ramon C. Cortines(1).................................  69    Director
Charles J. Delaney(1)(2).............................  41    Director
Jeffrey T. Leeds(2)..................................  45    Director
Jonathan Newcomb(1)..................................  55    Director
Timothy P. Shriver...................................  42    Director
William F. Weld(2)...................................  56    Director
</Table>

---------------

(1) Member of the Finance and Audit Committee

(2) Member of the Compensation Committee

     Set forth below is certain information regarding the professional
experience for each of the above-named persons.

     H. Christopher Whittle, Edison's founder, has served as President since
March 1997 and as Chief Executive Officer since July 1998. He has served as a
director since 1992 and also served as our Chairman of the Board of Directors
from 1992 until March 1995. He is the President and sole stockholder of WSI
Inc., a corporation wholly owned by Mr. Whittle with the current primary purpose
of holding Mr. Whittle's personal investments. From 1986 to 1994, Mr. Whittle
was Chairman and Chief Executive Officer of Whittle Communications L.P., which
developed magazines and other print publications as well as Channel One, an
advertising-supported daily news and information television program for schools.
Before that, Mr. Whittle was the founder of 13-30 Corporation, the predecessor
of Whittle Communications L.P., and served as the publisher of Esquire magazine
from 1979 to 1986.

     Benno C. Schmidt,Jr. has served as Chairman of the Board of Directors since
March 1997. He also served as our Chief Executive Officer from 1992 to June
1998, our President from 1992 to February 1997 and our Chief

                                        23
<PAGE>   24

Education Officer from July 1998 through April 1999. Mr. Schmidt served as
President of Yale University from 1986 to 1992. He also served as Dean of the
Columbia University School of Law from 1984 to 1986.

     Christopher D. Cerf has served as Chief Operating Officer since May 1999
and as a director since November 2000. He also served as our General Counsel
from June 1997 to April 2000. Prior to joining us, he was a partner in the law
firm of Wiley, Rein and Fielding from May 1996 to May 1997. Between 1994 and May
1996, he served in the White House as Associate Counsel to the President. Mr.
Cerf is also a former high school history teacher.

     Adam Feild has served as Chief Financial Officer and Executive Vice
President since January 2001. From February 2000 until December 2000, he was
Chief Financial Officer of nickandpaul inc., a marketing and branding
consultancy, as well as a non-executive member of our financial staff. From
March 1997 to February 2000, he served in a variety of positions with us, most
recently as our Senior Vice President, Finance, and prior to that as our Vice
President, Capital Finance. Prior to joining us, from 1995 to March 1997, Mr.
Feild was an associate with J.W. Childs Associates, a private equity firm.

     John E. Chubb has served as Chief Education Officer and Executive Vice
President since May 1999. Prior to that, he served as Executive Vice President
of Curriculum, Instruction and Assessment from 1992 to April 1999.

     Laura K. Eshbaugh has served in a variety of roles since joining us at our
inception in 1992, most recently serving as Executive Vice President since July
1998. She also served as a director from 1992 to November 2000. From 1989 to
September 1994, Ms. Eshbaugh served as Vice Chairman of Whittle Communications
L.P.

     Reverend Floyd H. Flake has served as President of Edison Charter Schools
since May 2000 and as a director since November 2000. He has also served as the
senior pastor of the Allen African Methodist Episcopal Church in Jamaica, Queens
since 1976. Reverend Flake has served as a Senior Fellow at the Manhattan
Institute for Social and Economic Policy since January 1998 and a columnist for
the New York Post since January 1998. Reverend Flake has been a member of the
Board of Directors of the Fannie Mae Foundation since January 1998 and an
Adjunct Fellow on the Advisory Board of the Brookings Institution Center on
Urban and Metropolitan Policy since February 1998. From January 1986 to December
1997, Reverend Flake served as a member of the United States House of
Representatives, representing the 6th district of New York.

     David A. Graff has served as General Counsel and Senior Vice President
since April 2000. From December 1998 to April 2000, he served as our Deputy
General Counsel. Prior to that, he was an associate in the law firm of Shea &
Gardner from September 1995 to December 1998.

     Kathleen M. Hamel has served as our Executive Vice President, Whole
District Partnerships since May 2000. From June 1999 to May 2000, she served as
Senior Vice President of Development, and prior to that as Vice President of
Development. Ms. Hamel joined us as a publishing specialist in January 1996.
Prior to joining us, Ms. Hamel was a senior marketing manager at Cathay Pacific
Airways.

     Tonya G. Hinch has served as Executive Vice President, School Operations
Division since April 2000. From June 1999 to April 2000, she served as our
Senior Vice President, School Operations Division, and from November 1998 to
June 1999, she served as our Vice President for Start-Up. Prior to joining us,
she served as Co-President of Ultrafem, Inc., a womens' reproductive health care
company, from October 1997 to October 1998, and as Ultrafem's Senior Vice
President for Marketing and Sales from November 1995 to October 1997. Ultrafem
declared bankruptcy in April 1998. From October 1993 to October 1995, she served
as General Manager of Haircare for Neutrogena, Inc., a subsidiary of Johnson &
Johnson Corporation.

     Deborah M. McGriff has served as President of Edison Teacher's Colleges
since May 2000. Prior to that time, she served as our Executive Vice President
of Development from February 1998 to May 2000. From November 1993 to February
1998, she served as our Senior Vice President of Charter School Development.
Before joining us, she was General Superintendent of the Detroit Public Schools.
Ms. McGriff earlier served as Assistant Superintendent in Cambridge,
Massachusetts and Deputy Superintendent in Milwaukee, Wisconsin.

                                        24
<PAGE>   25

     Donald N. Sunderland has served as Chief Information Officer and Executive
Vice President since January 1999. He previously served as Managing Director and
Head of Global Technology for Fixed Income and FX Derivatives at the Union Bank
of Switzerland from October 1995 to September 1998. Prior to that time, from
July 1994 to August 1995, he served as Head of Global Technology for Sumitomo
Bank Capital Markets.

     Joan Ganz Cooney has served as a director since November 2000. Ms. Cooney
is the Chairman, Executive Committee, of the Sesame Workshop, formerly the
Children's Television Workshop. Ms. Cooney co-founded the Children's Television
Workshop as its Executive Director in 1968 and was named its President-Chief
Executive Officer in 1970 and Chairman-Chief Executive Officer in 1988. She
assumed her present responsibilities in 1990. Mrs. Cooney is on the Boards of
Directors of Johnson & Johnson, the Metropolitan Life Insurance Company, the
Museum of Television and Radio and The New York and Presbyterian Hospitals, Inc.
She is a Life Trustee of the National Child Labor Committee and of WNET, Channel
13.

     Ramon C. Cortines has served as a director since July 2000. Mr. Cortines
earlier served on our Board of Directors from October 1999 to November 1999,
when he resigned to become to the Interim Superintendant of the Los Angeles
Unified School District, a position he held from November 1999 to June 2000. He
has served as the Executive Director of the Pew Network for Standards Based
Reform at Stanford University since August 1997. He was a senior advisor to the
Secretary of Education of the U.S. Department of Education from November 1995 to
December 1999. Mr. Cortines served as the Acting Assistant Secretary for
Educational Research and School Improvement at the U.S. Department of Education
from March 1997 to August 1997. From November 1993 to October 1995, he served as
the Chancellor of the New York City Public Schools. Mr. Cortines serves on the
Board of Directors of Scholastic Corporation.

     Charles J. Delaney has served as a director since July 1999. Mr. Delaney is
the President of UBS Capital Americas, which is the manager for two private
equity funds that make investments in the U.S. and Latin America. Mr. Delaney
served as President of UBS Capital LLC from May 1989 to December 1999. UBS
Capital Americas and UBS Capital LLC are affiliated with UBS AG. Mr. Delaney
serves on the Boards of Directors of Aurora Foods, Inc. and AMS Holdings Corp.

     Jeffrey T. Leeds has served as a director since November 1996. He has been
a principal of Leeds Weld & Co., a private investment firm, since December 2000,
and a principal of Leeds Equity Management L.L.C., a private investment firm,
since November 1999. He has also been a principal of Advance Capital Management
L.L.C., a private investment firm, since October 1995, and has served as
President of Leeds Group Inc., an investment banking firm, since January 1993.
Mr. Leeds serves on the Boards of Directors of TransAct Technologies, Inc.,
Argosy Education Group Inc., Domenica Management, Inc., DataMark, Inc. and Real
Page, Inc. He serves as a Trustee of the Cooper Hewitt National Design Museum.

     Jonathan Newcomb has served as a director since November 2000. He has
served as the Chief Executive Officer and Chairman of the Board of Directors of
Simon & Schuster, Inc., a publishing company, since 1994. Mr. Newcomb is a
director of the Hong Kong Shanghai Bank Corporation USA and The Bureau of
National Affairs, Inc. and serves as a Trustee of Dartmouth College and the New
School University.

     Timothy P. Shriver has served as a director since September 2001. He has
served as President and Chief Executive Officer of Special Olympics, Inc. since
July 1996. Mr. Shriver serves on the Board of Trustees for Phoenix Home Life
Mutual Insurance Company and is on the Boards of Directors for the Education
Compact for Learning and Citizenship and The John F. Kennedy Library Foundation.

     William F. Weld has served as a director since October 1999. He has been a
principal of Leeds Weld & Co., a private investment firm, since December 2000.
He was a partner with the law firm of McDermott, Will & Emery from November 1997
to December 2000. From January 1991 to July 1997, Mr. Weld served as the
Governor of the Commonwealth of Massachusetts. Mr. Weld serves on the Boards of
Directors of Affiliated Managers Group, Inc., IDT Corp. and Domenica Management,
Inc.

                                        25
<PAGE>   26

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our class A common stock began trading on the Nasdaq National Market on
November 11, 1999, under the symbol "EDSN." The following table sets forth for
the indicated periods the high and low sale prices of our class A common stock
as reported by the Nasdaq National Market.

<Table>
<Caption>
PERIOD                                                         HIGH     LOW
------                                                        ------   ------
<S>                                                           <C>      <C>
  Fiscal Year Ended June 30, 2000:
     Second Quarter (beginning November 11, 1999)...........  $18.44   $14.50
     Third Quarter..........................................  $25.13   $12.75
     Fourth Quarter.........................................  $26.50   $19.25
  Fiscal Year Ended June 30, 2001:
     First Quarter..........................................  $34.25   $21.25
     Second Quarter.........................................  $32.81   $23.00
     Third Quarter..........................................  $38.75   $19.50
     Fourth Quarter.........................................  $28.00   $15.90
</Table>

     There is no established trading market for our class B common stock. 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.

     As of September 25, 2001, we had approximately 164 holders of record of
class A common stock and 64 holders of record of class B common stock. Because
many of these shares are held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of stockholders
represented by these holders of record.

     We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all future earnings, if any, for use in
the operation of our business.

     On July 3, 2001 and September 4, 2001, we issued an aggregate of 1,360,954
shares of our class A common stock to the stockholders of LearnNow, Inc. in
connection with our acquisition of LearnNow, of which 274,648 shares are being
held in escrow to satisfy the indemnification obligations of the former LearnNow
stockholders. The class A common stock issued in this transaction was issued in
reliance on the exemption from registration set forth under Rule 506 of the
Securities Act. No underwriters were involved in this issuance of securities.

                                        26
<PAGE>   27

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 2 in the notes to our
financial statements for 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 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       315,652
  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        34,143
  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       416,540
                                           ----------   ----------   ----------   -----------   -----------
Loss from operations.....................     (11,385)     (20,869)     (49,302)      (37,945)      (40,722)
Other income (expense), net..............         (37)      (1,046)        (131)        1,355         3,555
                                           ----------   ----------   ----------   -----------   -----------
Loss from operations before provision for
  taxes..................................     (11,422)     (21,915)     (49,433)      (36,590)      (37,167)
Provision for state and local taxes......          --           --           --            --          (914)
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)  $       (83)
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   $    60,166
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)  $    (4,708)
Cash used in operating activities........  $  (10,941)  $  (10,550)  $  (16,079)  $   (40,350)  $   (22,602)
Cash used in investing activities........  $  (13,030)  $  (20,082)  $  (30,328)  $   (90,194)  $   (80,967)
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>

---------------

(1) Does not include students enrolled in our summer school program.

                                        27
<PAGE>   28

<Table>
<Caption>
                                                                      AS OF JUNE 30,
                                                   -----------------------------------------------------
                                                    1997       1998       1999       2000        2001
                                                   -------   --------   --------   ---------   ---------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                <C>       <C>        <C>        <C>         <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................  $15,741   $  7,492   $ 27,923   $  52,644   $  96,195
Working capital..................................   19,843      2,684     22,634      61,031     114,843
Total assets.....................................   48,472     58,294    106,870     251,030     401,211
Total debt, including current portion............    9,395     17,151     21,535      36,280      45,524
Accumulated deficit..............................   (7,581)   (29,496)   (78,929)   (115,518)   (153,599)
Total stockholders' equity.......................   33,814     29,190     63,042     182,513     307,980
</Table>

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 $153.6 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

     - upgrades in facilities.

                                        28
<PAGE>   29

     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

     Our revenue is principally derived from contractual relationships to manage
and operate contract and charter schools. In fiscal 2001, we received revenue
from our summer school programs which represented 2.8% of total revenues. We
also receive small amounts of revenue, which represented 1.4% of total revenue
in fiscal 2001, from the collection of after-school program fees and food
service costs. We receive per-pupil revenue from local, state and federal
sources, including Title I and special education funding, in return for
providing comprehensive education to our students. The per-pupil revenue is
generally comparable to the funding spent on other public schools in the area.
We recognize such revenue for each school pro rata over the 11 months from
August through June. Because the amount of revenue we receive for operating each
school depends on the number of students enrolled, achieving site-specific
enrollment objectives is necessary for satisfactory financial performance at the
school. Both the amount of per-pupil revenue and the initial enrollment at each
school become known at the beginning of the school year and generally tend not
to vary significantly throughout the year. For these reasons, our revenue for
each school year is largely predictable at the beginning of the school year.

  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. The remaining direct site expenses include on-site
administration, facility maintenance and, in some cases, transportation and food
services. 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.

  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

                                        29
<PAGE>   30

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 $153.6 million. In addition,
prior to November 1996, we incurred losses of approximately $61.8 million, which
are reflected in our additional paid-in capital.

                                        30
<PAGE>   31

     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>

     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

                                        31
<PAGE>   32

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 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.

                                        32
<PAGE>   33

     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.

     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 $34.1 million for fiscal 2001 from $20.9 million for fiscal 2000, an increase
of 63.2%. 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 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 110.8% 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 $4.7 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 $83 in fiscal 2001 compared to $349 for the prior year.

     Loss from Operations.  Our loss from operations increased to $40.7 million
for fiscal 2001 from $37.9 million for fiscal 2000, an increase of 7.4%. 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%.
                                        33
<PAGE>   34

  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.

     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.

                                        34
<PAGE>   35

     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.

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 $31.2 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.

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<PAGE>   36

     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.

     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

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<PAGE>   37

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.

     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.
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<PAGE>   38

 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.

 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 $153.6 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.

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<PAGE>   39

 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 receive 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 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.

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<PAGE>   40

     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 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.

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<PAGE>   41

  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, 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.

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<PAGE>   42

  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 receive 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 receive 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.

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<PAGE>   43

  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

                                        43
<PAGE>   44

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 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

                                        44
<PAGE>   45

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, 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
       receive 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.

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<PAGE>   46

     - 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.

  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 RECEIVE 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.
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<PAGE>   47

  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.

  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
                                        47
<PAGE>   48

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.

  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

                                        48
<PAGE>   49

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.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We currently have market risk sensitive instruments related to interest
rates. As disclosed in note 6 of the notes to our financial statements, we had
outstanding long-term notes payable of $17.8 million and $21.2 million at June
30, 2000 and 2001, respectively. Interest rates on the notes are fixed and range
from 9.5% to 20.4% per annum and have terms of 36 to 48 months.

     We do not believe that we have significant exposure to changing interest
rates on long-term debt because interest rates for our debt is fixed. We have
not undertaken any additional actions to cover interest rate market risk and are
not a party to any other interest rate market risk management activities.

     Additionally, we do not have significant exposure to changing interest
rates on invested cash, which was approximately $52.6 million and $96.2 million
at June 30, 2000 and June 30, 2001, respectively. We invest cash mainly in money
market accounts and other investment-grade securities. We do not purchase or
hold derivative financial instruments for trading purposes.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Our financial statements together with the related notes and the report of
PricewaterhouseCoopers LLP, independent auditors, are set forth in the Index to
Financial Statements at Item 14 and incorporated herein by this reference.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

     None.

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<PAGE>   50

                                    PART III

     Certain information required by Part III is omitted from this Annual Report
as we intend to file our definitive Proxy Statement for our Annual Meeting of
Stockholders to be held on December 6, 2001, pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, not later than 120 days after the
end of the fiscal year covered by this Annual Report, and certain information
included in the Proxy Statement is incorporated herein by reference.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     (a)  Executive Officers and Directors -- The information in the section
entitled "Executive Officers and Directors of the Registrant" in Part I hereof
is incorporated herein by reference.

     (b)  Directors -- The information in the section entitled "Election of
Directors" in the Proxy Statement is incorporated herein by reference.

     The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.

ITEM 11.  EXECUTIVE COMPENSATION

     The information in the sections entitled "Compensation of Executive
Officers", "Compensation of Directors" and "Compensation Committee Interlocks
and Insider Participation" in the Proxy Statement is incorporated herein by
reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information in the section entitled "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.

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<PAGE>   51

                                    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...........................   53
Consolidated Balance Sheets as of June 30, 2001 and 2000....   54
Consolidated Statements of Operations for the years ended
  June 30,1999, 2000, and 2001..............................   55
Consolidated Statements of Changes in Stockholders' Equity
  for the years ended June 30, 1999, 2000 and 2001..........   56
Consolidated Statements of Cash Flows for the years ended
  June 30, 1999, 2000 and 2001..............................   57
Notes to Consolidated Financial Statements..................   58
</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.

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<PAGE>   52

                                   SIGNATURES

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

                                          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
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the 26th day of September, 2001.

<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                       Chief Financial Officer (Principal Accounting
-----------------------------------------------------   Officer)
                     Adam Feild

               /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/ RAMON C. CORTINES                   Director
-----------------------------------------------------
                  Ramon C. Cortines

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

                /s/ JEFFREY T. LEEDS                    Director
-----------------------------------------------------
                  Jeffrey 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>

                                        52
<PAGE>   53

                       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.

                                          PRICEWATERHOUSECOOPERS LLP

Melville, New York
August 22, 2001

                                        53
<PAGE>   54

                              EDISON SCHOOLS INC.
                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                        JUNE 30
                                                              ---------------------------
                                                                  2000           2001
                                                              ------------   ------------
<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      3,279,695
                                                              ------------   ------------
          Total current assets..............................   104,532,573    178,914,043
Property and equipment, net.................................    98,133,719    119,215,687
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   $401,210,620
                                                              ============   ============
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..........................................    16,210,911     26,903,286
                                                              ------------   ------------
          Total current liabilities.........................    43,502,066     64,070,589
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.................................    68,517,377     92,750,854
                                                              ------------   ------------
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..................................   303,060,911    465,938,018
Unearned stock-based compensation...........................    (3,160,004)    (2,386,678)
Accumulated deficit.........................................  (115,518,323)  (153,598,963)
Stockholder note receivable.................................    (2,299,607)    (2,488,892)
                                                              ------------   ------------
          Total stockholders' equity........................   182,513,045    307,980,306
                                                              ------------   ------------
          Total liabilities and stockholders' equity........  $251,030,422   $401,210,620
                                                              ============   ============
</Table>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        54
<PAGE>   55

                              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    315,651,541
  Administration, curriculum and development.......    49,984,180     40,643,025     58,104,452
  Depreciation and amortization....................    12,525,904     20,905,833     34,142,738
  Preopening expenses..............................     5,457,113      8,371,923      8,641,021
                                                     ------------   ------------   ------------
          Total education and operating expenses...   182,064,072    262,522,488    416,539,752
                                                     ------------   ------------   ------------
Loss from operations...............................   (49,301,581)   (37,944,897)   (40,722,071)
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 from operations before provision for taxes....   (49,432,791)   (36,589,614)   (37,166,812)
Provision for state and local taxes................            --             --        913,828
                                                     ------------   ------------   ------------
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>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        55
<PAGE>   56

                              EDISON SCHOOLS INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED JUNE 30, 1999, 2000 AND 2001
<Table>
<Caption>
                                                                                        COMMON STOCK
                                                 PREFERRED STOCK        ---------------------------------------------
                                                   SERIES A-G                SERIES A-I                CLASS A
                                            -------------------------   ---------------------   ---------------------
                                              SHARES        AMOUNT        SHARES      AMOUNT      SHARES      AMOUNT
                                            -----------   -----------   ----------   --------   ----------   --------
<S>                                         <C>           <C>           <C>          <C>        <C>          <C>
Balances, June 30, 1998...................   21,724,147   $   494,937    3,107,356   $ 31,074
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    3,107,356   $ 31,074
Issuance of Series F preferred stock,
 net......................................    3,393,619        33,936
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
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)  (3,107,357)   (31,074)  31,240,934    312,409
Fractional Class A and Class B common
 shares issued due to rounding during
 conversion...............................                                                          15,319        153
Conversion of Class B to Class A).........                                                          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
Issuance of Class A common Stock in
 secondary offerings......................                                                       6,881,026     68,810
Stock warrants exercised..................                                                         842,426      8,425
Stock options exercised...................                                                         951,687      9,516
To reclass Class B converted to class A...                                                       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
                                            ===========   ===========   ==========   ========   ==========   ========

<Caption>
                                                COMMON STOCK
                                            ---------------------
                                                   CLASS B           ADDITIONAL      UNEARNED                     STOCKHOLDER
                                            ---------------------     PAID-IN      STOCK-BASED     ACCUMULATED       NOTES
                                              SHARES      AMOUNT      CAPITAL      COMPENSATION      DEFICIT      RECEIVABLE
                                            ----------   --------   ------------   ------------   -------------   -----------
<S>                                         <C>          <C>        <C>            <C>            <C>             <C>
Balances, June 30, 1998...................                          $ 59,035,198   $  (874,987)   $ (29,495,918)
Issuance of Series D preferred stock,
 net......................................                            31,722,481
Issuance of Series F preferred stock,
 net......................................                            24,228,435
Issuance of Series G preferred stock,
 net......................................                             4,897,755
Deferred compensation related to stock
 options..................................                            27,332,927   (27,332,927)
Stock-based compensation..................                                          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)
                                            ----------   --------   ------------   ------------   -------------   -----------
Balances, June 30, 1999...................                          $146,190,334   $(5,836,556)   $ (78,928,709)
Issuance of Series F preferred stock,
 net......................................                            41,707,771
Issuance of Series I common stock, net....
Issuance of Class A common stock in an
 initial public offering..................                           109,632,298
Stock warrants exercised..................                                43,893
Stock options exercised...................      72,500        725      2,921,813
Deferred compensation related to stock
 options..................................                             1,260,645    (1,260,645)
Stock based compensation..................                                           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.............................   3,471,215     34,712      1,304,158
Fractional Class A and Class B common
 shares issued due to rounding during
 conversion...............................     (15,172)      (152)            (1)
Conversion of Class B to Class A).........     (80,539)      (805)
Stockholder notes receivable..............
Interest on stockholder receivable........                                                                          (124,607)
Net loss for the year ended June 30,
 2000.....................................                                                          (36,589,614)
                                            ----------   --------   ------------   ------------   -------------   -----------
Balances, June 30, 2000...................   3,448,004   $ 34,480   $303,060,911   $(3,160,004)   $(115,518,323)  $(2,299,607)
Issuance of Class A common Stock in
 secondary offerings......................                           151,661,865
Stock warrants exercised..................         242          2      5,083,787
Stock options exercised...................                             5,033,677
To reclass Class B converted to class A...  (1,015,120)   (10,151)
Deferred compensation related to stock
 options..................................                             1,097,778    (1,097,778)
Stock based compensation..................                                           1,871,104
Interest on stockholder receivable........                                                                          (189,285)
Net loss for the year ended June 30,
 2001.....................................                                                          (38,080,640)
                                            ----------   --------   ------------   ------------   -------------   -----------
Balances, June 30, 2001...................   2,433,126   $ 24,331   $465,938,018   $(2,386,678)   $(153,598,963)  $(2,488,892)
                                            ==========   ========   ============   ============   =============   ===========

<Caption>

                                               TOTAL
                                            ------------
<S>                                         <C>
Balances, June 30, 1998...................  $ 29,190,304
Issuance of Series D preferred stock,
 net......................................    31,763,564
Issuance of Series F preferred stock,
 net......................................    24,248,222
Issuance of Series G preferred stock,
 net......................................     4,901,755
Deferred compensation related to stock
 options..................................            --
Stock-based compensation..................    22,371,358
Accretion of Series D preferred PIK
 dividend.................................            --
Net loss for the year ended June 30,
 1999.....................................   (49,432,791)
                                            ------------
Balances, June 30, 1999...................  $ 63,042,412
Issuance of Series F preferred stock,
 net......................................    41,741,707
Issuance of Series I common stock, net....            --
Issuance of Class A common stock in an
 initial public offering..................   109,700,298
Stock warrants exercised..................        49,869
Stock options exercised...................     2,930,783
Deferred compensation related to stock
 options..................................            --
Stock based compensation..................     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.............................            --
Fractional Class A and Class B common
 shares issued due to rounding during
 conversion...............................            --
Conversion of Class B to Class A).........            --
Stockholder notes receivable..............    (2,175,000)
Interest on stockholder receivable........      (124,607)
Net loss for the year ended June 30,
 2000.....................................   (36,589,614)
                                            ------------
Balances, June 30, 2000...................  $182,513,045
Issuance of Class A common Stock in
 secondary offerings......................   151,730,675
Stock warrants exercised..................     5,092,214
Stock options exercised...................     5,043,193
To reclass Class B converted to class A...            --
Deferred compensation related to stock
 options..................................            --
Stock based compensation..................     1,871,104
Interest on stockholder receivable........      (189,285)
Net loss for the year ended June 30,
 2001.....................................   (38,080,640)
                                            ------------
Balances, June 30, 2001...................  $307,980,306
                                            ============
</Table>

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

                                        56
<PAGE>   57

                              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)      (194,129)
    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      9,500,208
      Other liabilities.....................................      (713,736)        95,902        251,462
                                                              ------------   ------------   ------------
           Cash used in operating activities................   (17,623,991)   (41,305,479)   (29,306,961)
                                                              ------------   ------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Additions to property and equipment.......................   (25,533,246)   (57,462,036)   (46,935,436)
  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)   (74,262,212)
                                                              ------------   ------------   ------------
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>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        57
<PAGE>   58

                              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 receives revenues which
approximate, on a per pupil basis, the average per pupil spending of the school
district in which the school is located.

2.  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, whichever 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 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.

                                        58
<PAGE>   59
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  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

     The Company recognizes revenue from each school on a pro rata basis over
eleven months from August through June (the "School year"). Revenue and revenue
estimates are principally derived from contractual relationships to manage and
operate contract and charter schools. The Company also receives revenue from the
summer school program, the collection of after-school program fees and food
service costs. The Company receives per-pupil revenue from local, state and
federal sources, including Title I and special education funding. The Company
periodically 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. These adjustments represent a
change in revenue estimates and accordingly are recorded as an adjustment to
accounts receivable. The majority of our revenues are received from public
sources and are subject to ongoing appropriations of governmental bodies.

  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 this or another philanthropic
entity to donate approximately $12.5 million in total to two clients, the
Company will be required to make such donation itself.

  PREOPENING COSTS

     The Company expenses certain preopening 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 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 related
discount.

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

                                        59
<PAGE>   60
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  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 10.

  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

                                        60
<PAGE>   61
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 9.

     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)
                                                               ============
</Table>

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

<Table>
<S>                                                            <C>
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 (on a weighted average
  basis)....................................................      5,974,982
Conversion of Class B Common stock (on a weighted average
  basis)....................................................     (1,014,991)
                                                               ------------
Weighted average shares of common stock outstanding used in
  computing basic and fully 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

                                        61
<PAGE>   62
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. Significant estimates include, among other
things, revenues, certain school expenses, useful lives, recoverability of
equipment, notes and other financing receivables, 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, "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 SFAS 142, 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

     Certain reclassifications have been made to the 1999 and 2000 financial
statements to conform to current year presentation.

3.  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

                                        62
<PAGE>   63
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 Note 13)

     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.

                                        63
<PAGE>   64
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Aggregate maturities of notes receivable are as follows:

<Table>
<S>                                                           <C>
For the fiscal year ending June 30,
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>

     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.

4.  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     94,092,255
Software license.........................................    11,658,986     11,694,133
Educational software and textbooks.......................    28,717,566     37,350,776
                                                           ------------   ------------
                                                            138,929,318    185,014,612
Accumulated depreciation and amortization................   (40,795,599)   (65,798,925)
                                                           ------------   ------------
  Property and equipment, net............................  $ 98,133,719   $119,215,687
                                                           ============   ============
</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

                                        64
<PAGE>   65
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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.

5.  ACCRUED EXPENSES

     Accrued expenses consist of the following:

<Table>
<Caption>
                                                                     JUNE 30,
                                                             -------------------------
                                                                2000          2001
                                                             -----------   -----------
<S>                                                          <C>           <C>
Accrued payroll and benefits...............................  $13,881,701   $24,729,135
Accrued taxes other than income............................    1,656,501     1,965,063
Accrued other..............................................      672,709       209,088
                                                             -----------   -----------
     Total accrued expenses................................  $16,210,911   $26,903,286
                                                             ===========   ===========
</Table>

                                        65
<PAGE>   66
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6.  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 7), 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 $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 either post additional cash collateral, or
pay off the debt.

     Aggregate maturities of notes payable are as follows:

<Table>
<S>                                                           <C>
For the fiscal year ending June 30,
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.

                                        66
<PAGE>   67
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7.  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.

8.  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 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 addition, in November 1999 and April 2000, the Company loaned $6,620,700
and $1,248,500, respectively to its President and Chief Executive Officer under
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

                                        67
<PAGE>   68
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

  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).

                                        68
<PAGE>   69
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9.  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 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

                                        69
<PAGE>   70
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

10.  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 the
following stock option plans: the 1998 Site Option Plan, the 1999 Stock Option
Plan and the 1999 Key Stock Incentive Plan. At the time of the Company's IPO in
November 1999, the board of directors provided that no additional stock options
would be granted under these plans.

     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 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.

                                        70
<PAGE>   71
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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........................   1,336,046       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             --      $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

                                        71
<PAGE>   72
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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:

<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 for fiscal 1999 and 50% for
fiscal 2000 and 2001; 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     EXCEEDED FAIR     EXERCISE PRICE
                                             EQUALED FAIR         VALUE AT       LESS THAN FAIR
                                           VALUE AT ISSUANCE      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>

11.  INCOME TAXES

     There is no provision for federal income taxes 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.

                                        72
<PAGE>   73
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The components of deferred tax assets 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
  Intangibles............................................       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.

     The Company has provided approximately $914,000 in 2001 for state and local
tax incomes relating to jurisdictions that require taxes to be recorded on bases
other than income.

12.  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.

13.  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

                                        73
<PAGE>   74
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

  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 $5.8 million.

  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.

                                        74
<PAGE>   75
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14.  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.

15.  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):

<Table>
<Caption>
                                                                      QUARTER
                                                      ----------------------------------------
2001                                                   FIRST      SECOND     THIRD     FOURTH
----                                                  --------   --------   -------   --------
<S>                                                   <C>        <C>        <C>       <C>
Revenues from educational services..................  $ 64,791   $102,295   $99,604   $109,128
Gross profit contribution...........................     4,260     17,353    17,562     20,991
Loss from operations................................   (20,136)    (3,964)   (7,185)    (9,437)
Net loss............................................   (19,539)    (3,191)   (6,551)    (8,799)
Loss per common share
  Basic and diluted.................................     (0.43)     (0.07)    (0.14)     (0.17)
</Table>

<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 profit 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>

16.  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.

                                        75
<PAGE>   76
                              EDISON SCHOOLS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  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 total 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.

     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. The Company does not
expect that any sums it may have to pay in connection with this liability would
have a materially adverse effect on its consolidated financial position, or
results of operation for fiscal 2002.

  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.

                                        76
<PAGE>   77

                                 EXHIBIT INDEX

<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 the 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.
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
</Table>

                                        77
<PAGE>   78

<Table>
<Caption>
EXHIBIT
NUMBER                             DESCRIPTION
-------                            -----------
<S>        <C>
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
</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. 333-84177).

 *** 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.

                                        78