<PAGE>   1


                                UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549

                                  FORM 10-Q

                                  (MARK ONE)

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

                FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

                                      OR

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

                      FOR THE TRANSITION PERIOD FROM TO

                       COMMISSION FILE NUMBER 000-27817

                             EDISON SCHOOLS INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

                521 Fifth Avenue, 11th Floor, New York, NY 10175
              (Address of principal executive offices) (Zip Code)

      Registrant's telephone number, including area code (212) 419-1600

             Former name, former address and former fiscal year,
                         if changed since last report


 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
 theregistrant was required to file such reports), and (2) has been subject to
 such filing requirements for the past 90 days.

                          (1) Yes X No (2) Yes X No

      The number of shares outstanding of each of the Registrant's classes of
common stock:

                                  48,826,583

 (Number of shares of Class A Common Stock Outstanding as of April 30, 2001)

                                  2,438,478

 (Number of shares of Class B Common Stock Outstanding as of April 30, 2001)


<PAGE>   2


                             EDISON SCHOOLS INC.
                    INDEX TO QUARTERLY REPORT ON FORM 10-Q
                     FOR THE QUARTER ENDED MARCH 31, 2001


<TABLE>
<CAPTION>
                                                                                                        Page
                                                                                                        ----

PART I. FINANCIAL INFORMATION
<S>                                                                                                     <C>
        ITEM 1. FINANCIAL STATEMENTS
                Condensed Consolidated Balance Sheets as of March 31, 2001 (unaudited) and
                   June 30, 2000...................................................................         3
                Condensed Consolidated Statements of Operations for the Three Months and
                  Nine Months Ended March 31, 2001 and 2000 (unaudited)............................         4
                Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
                  March 31, 2001 and 2000 (unaudited)..............................................         5
                Notes to Condensed Consolidated Financial Statements (unaudited)...................      6-11
        ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS...............................................     11-26
        ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........................        27

PART II. OTHER INFORMATION

        ITEM 1. LEGAL PROCEEDINGS..................................................................        28
        ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..........................................        28
        ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................................        28
        ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................        28
        ITEM 5. OTHER INFORMATION..................................................................        28
        ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................        28
                SIGNATURES.........................................................................        29
</TABLE>



<PAGE>   3


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                             EDISON SCHOOLS INC.
                    CONDENSED CONSOLIDATED BALANCE SHEETS
                            (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                         MARCH 31,
                                                                           2001        JUNE 30,
                                                                        (UNAUDITED)      2000
                                                                       ------------  ------------
<S>                                                                  <C>            <C>
ASSETS:
Current assets:
   Cash and cash equivalents .....................................     $   110,340   $    52,644
   Accounts receivable............................................          54,006        33,753
   Notes and other receivables....................................           9,909        14,515
   Other current assets ..........................................           4,985         3,620
                                                                       ------------  ------------
     Total current assets ........................................         179,240       104,532

Property and equipment, net.......................................         136,365        98,134
Restricted cash ..................................................           6,593         3,387
Notes and other receivables.......................................          48,657        16,024
Stockholder notes receivable......................................           9,314         8,802
Investments.......................................................           8,075         8,025
Other assets......................................................          12,891        12,126
                                                                       ------------  ------------

     Total assets.................................................     $   401,135   $   251,030
                                                                       ============  ============

LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
   Current portion of long term debt..............................     $    16,700   $    11,838
   Accounts payable...............................................          13,167        15,453
   Accrued expenses...............................................          22,473        16,211
                                                                       ------------  ------------
     Total current liabilities....................................          52,340        43,502

Long term debt, less current portion..............................          25,453        17,830
Stockholders' notes payable.......................................           6,611         6,611
Other liabilities.................................................             762           574
                                                                       ------------  ------------
   Total liabilities .............................................          85,166        68,517
                                                                       ------------  ------------

Minority interest in subsidiary...................................             500             -
                                                                       ------------  ------------

Common stock:
   Class A common, par value $.01; 150,000,000 shares authorized;
    48,793,479 and 39,558,746 shares issued and outstanding at
    March 31, 2001 and June 30, 2000, respectively ...............             488           396

   Class B common, par value $.01; 5,000,000 shares authorized;
    2,438,478 and 3,448,004 shares issued and outstanding at
    March 31, 2001 and June 30, 2000, respectively................              25            34

Additional paid-in capital........................................         465,012       303,061
Unearned stock-based compensation.................................          (2,807)       (3,160)
Accumulated deficit...............................................        (144,800)     (115,518)
Stockholder note and accrued interest receivable .................          (2,449)       (2,300)
                                                                       ------------  ------------
     Total stockholders' equity...................................         315,469       182,513
                                                                       ------------  ------------

     Total liabilities and stockholders' equity...................     $   401,135    $  251,030
                                                                       ============  ============
</TABLE>


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




<PAGE>   4


                              EDISON SCHOOLS INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
          FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2001 AND 2000
                (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)




<TABLE>
<CAPTION>
                                                                                                   (UNAUDITED)
                                                                                 THREE MONTHS ENDED           NINE MONTHS ENDED
                                                                              MARCH 31,     MARCH 31,      MARCH 31,     MARCH 31,
                                                                                2001           2000          2001          2000
                                                                            -------------- ------------- -------------- ------------
<S>                                                                       <C>             <C>           <C>            <C>
Revenue from educational services....................................       $      99,604  $     61,531  $     266,690  $   164,278
Education and operating expenses:
     Direct site expenses............................................              82,042        51,550        227,515      142,238
     Administration, curriculum and development......................              14,763         9,733         38,467       29,889
     Preopening expenses.............................................                 639         1,088          6,987        5,546
     Depreciation and amortization...................................               9,345         5,731         25,006       14,856
                                                                            -------------- ------------- -------------- ------------
          Total education and operating expenses.....................             106,789        68,102        297,975      192,529
                                                                            -------------- ------------- -------------- ------------

           Loss from operations......................................              (7,185)       (6,571)       (31,285)     (28,251)
Other income (expense):
     Interest income.................................................               2,153         2,082          7,259        4,285
     Interest expense................................................              (1,358)       (1,043)        (3,792)      (2,571)
     Other...........................................................                  16          (606)          (392)      (1,314)
                                                                            ============== ============= ============== ============
           Total other...............................................                 811           433          3,075          400
                                                                            ============== ============= ============== ============


           Loss from operations before provision for state taxes                   (6,374)       (6,138)       (28,210)     (27,851)

Provision for state taxes                                                            (177)            -         (1,071)           -
                                                                            ============== ============= ============== ============

            Net loss attributable to common stockholders.............       $      (6,551) $     (6,138) $     (29,281) $   (27,851)
                                                                            ============== ============= ============== ============

Per common share data:

      Basic and diluted net loss per share...........................       $       (0.14) $      (0.14) $       (0.63) $     (1.23)
                                                                            ============== ============= ============== ============

      Weighted average shares of common stock outstanding
            used in computing basic and diluted net loss per share...              47,794        42,518         46,831       22,707
                                                                            ============== ============= ============== ============

Pro forma per share data:

      Pro forma basic and diluted net loss per share.................                                                         (0.73)
                                                                                                                        ============
      Pro forma weighted average shares outstanding used in
      computing basic and diluted net loss per share.................                                                        38,372
                                                                                                                        ============

</TABLE>

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

<PAGE>   5


                               EDISON SCHOOLS INC.
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                FOR THE NINE MONTHS ENDED MARCH 31, 2001 AND 2000
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                                          (UNAUDITED)
                                                                                                    2001               2000
                                                                                               -------------       -------------
<S>                                                                                           <C>               <C>
Cash flows from operating activities:
  Net loss..............................................................................       $   (29,281)        $   (27,851)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization of property and equipment.............................            22,881              13,671
    Amortization of other costs.........................................................               710                  16
    Stock-based compensation............................................................             1,451               2,809
    Equipment loss......................................................................               457                 351
    Interest on stockholder note receivable.............................................              (149)                  -
    Changes in working capital accounts.................................................           (22,540)            (24,476)
    Other ..............................................................................              (195)               (135)
                                                                                               -------------       -------------
         Cash used in operating activities..............................................           (26,666)            (35,615)
                                                                                               -------------       -------------

Cash flows from investing activities:
   Additions to property and equipment..................................................           (43,485)            (53,368)
   Proceeds from disposition of property and equipment, net.............................             1,074               2,058
   Proceeds from notes receivable and advances due from charter schools.................            10,149               3,640
   Notes receivable and advances due from charter schools...............................           (37,403)            (10,931)
   Investment in non consolidated entity................................................               (35)                  -
   Minority interest investment in consolidated subsidiary..............................               550                   -
   Other assets.........................................................................               577              (9,333)
                                                                                               -------------       -------------
         Cash used in investing activities..............................................           (68,573)            (67,934)
                                                                                               -------------       -------------

Cash flows from financing activities:
   Proceeds of stock and warrants.......................................................           172,081             167,123
   Costs in connection with equity financing............................................           (11,146)            (13,362)
   Payment to stockholder...............................................................              -                 (2,175)
   Proceeds from notes payable..........................................................             6,178              11,993
   Payments on notes payable and capital leases.........................................           (10,972)             (6,682)
   Restricted cash .....................................................................            (3,206)               (235)
                                                                                               -------------       -------------
           Cash provided by financing activities........................................           152,935             156,662
                                                                                               -------------       -------------

Increase in cash and cash equivalents...................................................            57,696              53,113

Cash and cash equivalents at beginning of period........................................            52,644              27,923
                                                                                               =============       =============

Cash and cash equivalents at end of period..............................................       $   110,340         $    81,036
                                                                                               =============       =============


Supplemental disclosure of cash flow information:
   Cash paid during the period for interest.............................................       $     4,058         $     2,452
                                                                                               =============       =============

Supplemental disclosure of non-cash investing and financing activities:
   Additions to property and equipment included in
     accounts payable...................................................................       $     1,881         $       511
                                                                                               =============       =============
   Additions to other assets included in accounts payable ..............................       $     2,694
                                                                                               =============
   Property and equipment acquired under capitalized lease obligations..................       $    17,278
                                                                                               =============

</TABLE>



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


<PAGE>   6






                             EDISON SCHOOLS INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.      BASIS OF PRESENTATION

        The unaudited condensed consolidated financial statements have been
prepared by Edison Schools Inc. (the "Company") in accordance with generally
accepted accounting principles ("GAAP") for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the
opinion of management, all adjustments, consisting of normal recurring items
necessary to present fairly the financial position and results of operations
have been included. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with GAAP have been
condensed or omitted pursuant to such SEC rules and regulations. These
financial statements should be read in conjunction with the financial
statements and related notes included in the Company's Annual Report on Form
10-K for the year ended June 30, 2000.

        The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Significant estimates
include, among other things, school revenues, certain school expenses, useful
lives, recoverability of equipment, deferred income tax valuation allowance,
certain accrued expenses and expenses in connection with stock options and
warrants. Actual results could differ from these estimates.

2.      DESCRIPTION OF BUSINESS

        The Company manages elementary and secondary public schools under
contracts with school districts and charter school boards located in 21 states
and Washington, D.C. The Company opened its first four schools in the fall of
1995, and, as of March 31, 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 school boards in obtaining
facilities and 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.

3.      EQUITY OFFERINGS AND RELATED MATTERS

        On October 5, 1999, the Board of Directors approved a proposal to
amend and restate the Company's certificate of incorporation. On October 26,
1999, the amended and restated certificate of incorporation was approved by
the Company's shareholders. The amended and restated certificate of
incorporation became effective upon the closing of the Company's initial
public offering on November 17, 1999 ("IPO"), and among other things, provided
that outstanding Series A through G Preferred stock converted into class A
common stock upon the closing of the IPO with the number of shares upon
conversion calculated as the original purchase price of each share plus
accrued and unpaid dividends divided by the conversion price multiplied by
nine-twentieths. In addition, each preferred share converted into a number of
shares of class B common stock upon the closing of the IPO calculated as the
original purchase price for each share plus accrued and unpaid dividends
divided by the conversion price multiplied by one-twentieth. Further, all
outstanding shares of existing common stock converted into nine-twentieths of
a share of class A common stock and one-twentieth of a share of class B common
stock upon the closing of the IPO. All fractional shares of class A common
stock and class B common stock were rounded up to the next larger number.
Additional information concerning the IPO and changes in the Company's capital
structure since June 30, 1999 may be found in the financial statements and
notes thereto in the Annual Report on Form 10-K.

        In August 2000, the Company completed a secondary offering of an
additional 3,350,000 shares of class A common 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 and paid the
Company approximately $4.8 million. The shares obtained in such warrant
exercise were sold along with the Company's shares in the secondary offering.

                                      6


<PAGE>   7

        In March 2001, the Company completed another secondary offering of an
additional 3,531,026 shares of class A common for net proceeds of
approximately $81.0 million.

4.      NET LOSS PER SHARE, AND PRO FORMA 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 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.

The calculations of basic and fully diluted net loss per share for the three
and nine month periods ended March 31, 2001 and 2000 are as follows:


<TABLE>
<CAPTION>
                                                                (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
                                                                THREE MONTHS ENDED        NINE MONTHS ENDED
                                                                   MARCH 31,    MARCH 31,    MARCH 31,    MARCH 31,
                                                                   2001         2000         2001         2000
                                                                   ----         ----         ----         ----
<S>                                                            <C>           <C>          <C>         <C>
Net loss....................................................    $    (6,551) $    (6,138) $  (29,281)  $  (27,851)
                                                                ============ ============ ===========  ===========

Class A Common Stock outstanding at beginning
   of period................................................         44,078       38,942      39,558        2,797
Class B Common Stock outstanding at beginning
   of period................................................          3,322        3,544       3,448          310
Add:
Issuance of Class A Common Stock
  (as if converted on a weighted average basis).............          1,277           45       4,834       18,005
Issuance (conversion) of Class B Common Stock
  (as if converted on a weighted average basis).............           (883)         (13)     (1,009)       1,595
                                                                ------------ ------------ -----------  -----------

Weighted average shares of common stock outstanding
   used in computing basic net loss per share...............         47,794       42,518      46,831       22,707
                                                                ============ ============ ===========  ===========
Basic and fully diluted net loss per share..................    $     (0.14) $     (0.14) $    (0.63)  $    (1.23)
                                                                ============ ============ ===========  ===========
</TABLE>


        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 pursuant to the IPO discussed
above.


                                      7

<PAGE>   8




The calculations of pro forma basic and fully diluted net loss per share for
the three and nine month periods ended March 31, 2000 are as follows:

<TABLE>
<CAPTION>
                                                                        (DOLLARS IN THOUSANDS EXCEPT PER
                                                                                 SHARE AMOUNTS)
                                                                        THREE MONTHS       NINE MONTHS
                                                                            ENDED             ENDED
                                                                          MARCH 31,           MARCH 31,
                                                                             2000               2000
                                                                        -------------    -------------
<S>                                                                    <C>             <C>
Net loss..............................................................  $     (6,138)    $    (27,851)
                                                                        =============    =============

Class A Common Stock outstanding at beginning of period...............        38,942           28,187
Class B Common Stock outstanding at beginning of period...............         3,544            3,132
Add:
Issuance of Class A Common Stock
  (as if converted on a weighted average basis).......................            45            6,710
Issuance (conversion) of Class B Common Stock
  (as if converted on a weighted average basis).......................           (13)             343
                                                                        -------------    -------------

Pro forma weighted average shares of common stock outstanding
  Used in computing basic and fully diluted net loss per share........        42,518           38,372
                                                                        =============    =============
Pro forma basic and fully diluted net loss per share..................  $      (0.14)    $      (0.73)
                                                                        =============    =============
</TABLE>

6.      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 have 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. For the quarter ended March 31, 2001, the Company
recognized a loss of $10,000 related to this investment.

7.      CREATION OF ALLIANCE-EDISON LLC

        On July 21, 2000, the Company formed Alliance-Edison LLC
("Alliance-Edison") by contributing $3.5 million for a 54.3% equity interest.
Alliance-Edison was established for the purpose of constructing the Dayton
View Academy charter school in Dayton, Ohio. Alliance-Edison's only asset is
the Dayton View Academy charter school facility, which has been constructed
under a five year ground lease (renewable for additional terms up to a total
of 35 years) with the Dayton Metropolitan Housing Authority (the "Ground
Lease"). Pursuant to the Ground Lease, Alliance-Edison has the option to
purchase the land at the conclusion of the lease term. The Company has also
guaranteed approximately $1.6 million of debt incurred by Alliance-Edison. The
minority interest investor contributed $550,000 in cash and a note for $2.4
million, which reduced the minority interest in the accompanying condensed
consolidated balance sheet.


                                      8


<PAGE>   9



8.      CREATION OF 110TH AND 5TH ASSOCIATES LLC

        On April 3, 2001, the Company formed 110th and 5th Associates LLC
("110th and 5th Associates") by contributing $2,500 for sole interest in the
entity. 110th and 5th Associates was established for the purpose of holding
the ownership interest in the property purchased in relation to the Edison
corporate headquarter project, as more fully described under the caption
"Additional Risk Factors that may Affect Future Results."

9.      STOCK-BASED COMPENSATION

        In accordance with Financial Accounting Standards Board Interpretation
44 ("Fin 44"), in the three months ended March 31, 2001, the Company
recognized a non-cash charge to earnings of $64,000 for certain former Edison
employees. These employees were allowed to retain their stock options and
investing rights beyond their separation date.

10.     NOTES AND OTHER RECEIVABLES

        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 loans are
evidenced by notes and other advances, made in connection with a management
contract without fixed repayment terms.

        At March 31, 2001, approximately $33.6 million of the approximate
$53.4 million in notes and advances, net, are collateralized. At June 30,
2000, approximately $6.7 million of the approximate $28.0 million in notes and
advances, net, are collateralized. The remaining balances are uncollateralized
and may be subordinated to other senior debt.

        In order for the loans to be repaid, the Company generally assists
charter school boards in obtaining third party lender financing. Upon
repayment of the loans to the Company, the Company may guarantee loans from
the third party lender. The 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.

          Notes and other receivables consist of the following:

<TABLE>
<CAPTION>

                                                    MARCH 31, 2001    JUNE 30, 2000
                                                    ----------------  -------------
<S>                                               <C>                <C>
Notes receivable due from charter schools.........  $        53,439   $     16,366
Advances due from charter schools.................                -         11,673
Other receivables.................................            5,127          2,500
                                                    ----------------  -------------

                                                             58,566         30,539
Less, Current portion.............................            9,909         14,515
                                                    ----------------  -------------
   Total notes and other receivables..............  $        48,657   $     16,024
                                                    ================  =============
</TABLE>


                                      9
<PAGE>   10



11.     COMMITMENTS AND CONTINGENCIES

        LONG TERM LEASE OBLIGATIONS

        The Company has entered into operating leases for four charter school
facilities with lease terms in excess of the initial term of the management
agreement for the schools operating in those facilities. The lease terms range
from 15 to 20 years. In the event that the management agreements for the
schools operating in these facilities are not renewed or are terminated, the
Company would be obligated to continue paying rent on the facilities as
follows:

<TABLE>
<CAPTION>
Fiscal Year           Annual Rent Payments
-----------           --------------------
<S>                   <C>
2001                  $696,000
2002                  $2.8 million
2003                  $2.8 million
2004                  $2.8 million
2005                  $2.8 million
Thereafter            $34.9 million
</TABLE>

In the event of non-renewal or termination, the Company retains the right to
sub-lease the property to another tenant.

        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 20, 2002 and (ii) if (a) the
Company fails either to raise or contribute $405,000 from sources outside of
the Dayton, Ohio area by May 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 March 31, 2001, the aggregate termination benefits of the
executives and certain other employees approximated $5.7 million.

        GUARANTEES

        The Company has guaranteed certain debt obligations of charter school
boards with which it has management agreements. As of March 31, 2001, the
Company had provided guarantees totaling approximately $15.2 million. The debt
obligations mature from August 2001 to November 2005.

        As of March 31, 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 the nine months ended March 31, 2001, and for fiscal 1998, 1999
and 2000 all covenants as guarantor have been met except that the Company
received waivers for June 30, 1998 and 1999, respectively, from one financial
institution as of



                                      10
<PAGE>   11



June 30, 1998 and 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. These instances of non-compliance were cured on July 1, 1998
and July 5, 1999, respectively.

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

        Certain of the matters and subject areas discussed in this Quarterly
Report on Form 10-Q contain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. All statements other
than statements of historical information provided herein are forward-looking
statements and may contain information about financial results, economic
conditions, trends and known uncertainties based on our current expectations,
assumptions, estimates and projections about our business and our industry.
These forward-looking statements involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these
forward-looking statements as a result of several factors, as more fully
described under the caption "Additional Risk Factors that may Affect Future
Results" and elsewhere in this Quarterly Report. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis, judgment, belief or expectation only as of the date
hereof. The forward-looking statements made in this Quarterly Report on Form
10-Q relate only to events as of the date on which the statements are made. We
undertake no obligation to publicly update any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.

OVERVIEW

        We are the nation's largest private operator of public schools serving
students from pre-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, currently serving approximately 57,000
students in 113 schools located in 21 states across the country and the
District of Columbia.

        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 March 31, 2001, our accumulated deficit
since November 1996 was approximately $144.8 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 believe that period-to-period
comparisons of our operating results may not be meaningful because of our
rapid growth and the evolving nature of our business and our limited operating
history.

        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, including laptop computers for teachers and, after
              the first year of operation, a computer for the home of every
              child above the second grade;

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

        -     Upgrades in facilities.

                                      11
<PAGE>   12


REVENUE FROM EDUCATIONAL SERVICES

        Our revenue is principally derived from contractual relationships to
manage and operate contract and charter schools. We also receive small amounts
of revenue, which represented less than 0.8% of total revenue for the nine
months ended March 31, 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 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 can be reasonably estimated 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 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, including 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 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 continue into the first quarter of the fiscal year in
which the school opens. These costs are expensed as incurred.


                                      12


<PAGE>   13


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.

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. While administered
closely at each school, our school enrollment levels are evaluated by
management in the aggregate.

RESULTS OF OPERATIONS

FISCAL QUARTER ENDED MARCH 31, 2001 COMPARED TO FISCAL QUARTER ENDED MARCH 31,
2000

        Revenue from Educational Services. Our revenue from educational
services increased to $99.6 million for the three months ended March 31, 2001
from $61.5 million for the same period of the prior year, an increase of 62%.
The increase was primarily due to a 52.0% increase in student enrollment from
37,500 in the 1999-2000 school year to 57,000 in the 2000-2001 school year,
reflecting both the opening of new schools and the expansion of existing
schools.

        Direct Site Expenses. Our direct site expenses increased to $82.0
million for the three months ended March 31, 2001 from $51.6 million for the
same period of the prior year, an increase of 58.9%. Similar to the increase
in revenue from educational services, the increase in direct site expenses was
primarily due to the 52.0% increase in student enrollment. The largest element
of direct site expenses is personnel costs. Personnel costs included in direct
site expenses increased to $66.0 million for the three months ended March 31,
2001 from $41.1 million for the same period of the prior year.

        Gross Site Contribution and Margin. Our gross site contribution was
$17.6 million for the three months ended March 31, 2001 compared to $10.0
million for the same period of the prior year. The corresponding gross site
margin increased to 17.6% for the three months ended March 31, 2001 from 16.2%
for the same period of the prior year. The increase in gross site contribution
of $7.6 million resulted from the larger revenues for the three month period
ended March 31, 2001 and improved gross site margin.

        Administration, Curriculum and Development Expenses. Our
administration, curriculum and development expenses increased to $14.8 million
for the three months ended March 31, 2001 from $9.7 million for the same
period of the prior year, an increase of 52.6%. The increase was substantially
due to greater personnel costs resulting from an increase of approximately 70
headquarters employees, which reflects a substantial increase in staff in our
school operations, curriculum and education divisions and an increase in our
central office administrative staff. We also incurred approximately $1.5
million in development expenses related to our unsuccessful efforts to obtain
contracts with five schools in New York City. Administration, curriculum and
development expenses also includes $392,000 of non-cash stock-based
compensation we incurred in the three months ended March 31, 2001 compared to
$935,000 for the same period of the prior year.

        Pre-opening Expenses. Our pre-opening expenses decreased to $639,000
for the three months ended March 31, 2001 from $1.1 million for the same
period of the prior year, a decrease of 41.9%. This decrease results from
pre-opening expenses being spent in the earlier quarters in fiscal 2001
compared to fiscal 2000. Excluding the non-cash charges discussed above, the
combined administration, curriculum and development and pre-opening expenses
as a percentage of revenues decreased to 15.1% for the three months ended
March 31, 2001 from 16.1% for the same period of the prior year.



                                      13
<PAGE>   14

        Depreciation and Amortization. Our depreciation and amortization
increased to $9.3 million for the three months ended March 31, 2001 from $5.7
million for the same period of the prior year, an increase of 63.2%. The
increased depreciation and amortization resulted from additional capital
expenditures for our curriculum materials, computers and related technology,
particularly the issuance of home computers, and facility improvements related
to the 52.0% increase in student enrollment. The increase was also due to
approximately $190,000 of amortization expense related to obligations assumed
in connection with our June 2000 contract with the Inkster School District.

        EBITDA, Net of Other Charges. EBITDA, net of other charges, is defined
as net gain or loss attributable to common stockholders excluding provision
for state taxes, other income or loss, depreciation and amortization and
non-cash stock-based compensation. This amount for the three months ended
March 31, 2001, was $2.6 million compared to approximately $100,000 for the
same period of the prior year. The increase primarily resulted from a higher
gross site margin and lower administration, curriculum and development, and
pre-opening expenses as a percentage of revenue. On a per-student basis,
EBITDA improved to $45 compared to $3 for the same period one year ago.

        Other Income and Expense. Other income, net was $811,000 for the three
months ended March 31, 2001 compared to $433,000 in the same period for the
prior year. For the three months ended March 31, 2000 we recorded our
applicable share of the quarterly net loss of Apex Online Learning, Inc, a
company that provides interactive advance placement courses for high school
students over the Internet. Because of our significant ownership in APEX, in
March 2000, we had to recognize $600,000 of losses as our pro rata share of
APEX' net loss for that period. However, on June 30, 2000 we modified our
relationship with APEX and, as a result, we are no longer required to
recognize any of APEX's losses, which is the reason for this year's increase.

        Provision for State Taxes. For the three months ended March 31, 2001,
the provision for taxes reflects corporate state income taxes arising from our
operation of several sites.

THE NINE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE NINE MONTHS ENDED MARCH
31, 2000

        Revenue from Educational Services. Our revenue from educational
services increased to $266.7 million for the nine months ended March 31, 2001
from $164.3 million for the same period of the prior year, an increase of
62.3%. The increase was primarily due to a 52% increase in student enrollment
from 37,500 in the 1999-2000 school year to 57,000 in the 2000-2001 school
year, reflecting both the opening of new schools and the expansion of existing
schools.

        Direct Site Expenses. Our direct site expenses increased to $227.5
million for the nine months ended March 31, 2001 from $142.2 million for the
same period of the prior year, an increase of 60.0%. Similar to 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 $182.6 million for the nine months ended March 31,
2001 from $114.1 million for the same period of the prior year.

        Gross Site Contribution and Margin. Our gross site contribution was
$39.2 million for the nine months ended March 31, 2001 compared to $22.0
million for the same period of the prior year. The corresponding gross site
margin increased to 14.7% for the nine months ended March 31, 2001 from 13.4%
for the same period of the prior year. The increase in gross site contribution
of $17.2 million resulted from the larger revenues for the nine months ended
March 31, 2001 combined with improved gross site margin.

        Administration, Curriculum and Development Expenses. Our
administration, curriculum and development expenses increased to $38.5 million
for the nine months ended March 31, 2001 from $29.9 million for the same
period of the prior year, an increase of 28.8%. The increase was substantially
due to greater personnel costs resulting from approximately 70 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. We also incurred approximately $1.5
million in development expenses related to our unsuccessful efforts to obtain
contracts with five schools in New York City. The increase was partially
offset by a vendor rebate of approximately $800,000 related to the design and
implementation of our technology program. Administration, curriculum and
development expenses also includes $1.5 million of non-cash stock-based
compensation we incurred in the nine months ended March 31, 2001 compared to
$2.8 million for the same period of the prior year.


                                      14
<PAGE>   15



        Pre-opening Expenses. Our pre-opening expenses increased to $7.0
million for the nine months ended March 31, 2001 from $5.5 million for the
same period of the prior year, an increase of 27.3%. 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 the
non-cash charges discussed above, administration, curriculum and development
and pre-opening expenses as a percentage of revenues decreased to 16.5% for
the nine months ended March 31, 2001 from 19.9% for the same period of the
prior year.

        Depreciation and Amortization. Our depreciation and amortization
increased 67.8% to $25.0 million for the nine months ended March 31, 2001 from
$14.9 million for the same period of the prior year. The increased
depreciation and amortization resulted from additional capital expenditures
for our curriculum materials, computers and related technology, and facility
improvements related to the 52% increase in student enrollment. In addition,
the earlier delivery and installation of the aforementioned capital assets at
the sites during in the current school year generated additional depreciation.
The increase was also due to approximately $570,000 of amortization expense
related to obligations assumed in connection with our June contract with the
Inkster School District.

        EBITDA, Net of Other Charges. EBITDA, net of other charges, is defined
as net gain or loss attributable to common stockholders excluding provision
for state taxes, other income or loss, depreciation and amortization and
non-cash stock-based compensation. This amount for the nine months ended March
31, 2001 was a negative $4.8 million compared to a negative $10.6 million for
the same period of the prior year. The improved negative EBITDA resulted
primarily from higher gross site margin and lower administration, curriculum
and development, and pre-opening expenses as a percentage of revenue. On a
per-student basis, negative EBITDA improved to $85 compared to $282 for the
same period one year ago.

        Other Income and Expenses. Other income, net was $3.1million for the
nine months ended March 31, 2001 compared to of $400,000 in the same period of
the prior year. The increase was primarily due to increased interest income
resulting from higher invested cash balances. Interest income was partially
offset by increased interest expense from expanded borrowings. For the nine
months ended March 31, 2000, we recognized $1.3 million of losses as our pro
rata share of APEX net loss for that period. We modified our relationship with
APEX on June 30, 2000, and as a result, we are no longer required to recognize
any of APEX's losses.

        Provision for State Taxes. For the nine months ended March 31, 2001,
the provision for taxes reflects corporate state income taxes arising from our
operation of several sites.

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. As of April 30, 2001, we have entered into financing and capital
lease arrangements with several lenders for a total of $23.6 million, of which
$4.5 million remains available to finance our technology and facilities
related expenditures in the current fiscal year. Although we have successfully
obtained financing in fiscal 2001 and in the past for technology and
facilities-related expenditures, there can be no assurance that we will be
able to obtain such financing, or on favorable terms, in the future.

        For the nine months ended March 31, 2001, we used approximately $26.7
million for operating activities. This use primarily resulted from $29.3
million of net loss and a $22.5 million net decrease in working capital
accounts partially offset by depreciation and amortization totaling $23.6
million and non-cash stock-based compensation expense of $1.5 million.

        For the nine months ended March 31, 2001, we used approximately $68.6
million in investing activities. During this period, we invested approximately
$43.5 million in our schools and central office. This amount includes the
investments we made in technology and curriculum in each of the schools we
open. We have also advanced funds to nine of our charter board clients or
their affiliates to help obtain, renovate and complete school facilities. The
amounts advanced for the nine months ended March 31, 2001 were approximately
$37.4 million. During this same period, we also received approximately $10.1
million in repayments on advances previously made. Also, the Company disposed
of leasehold improvements totaling approximately $1.1 million. In July 2000,
we received an equity contribution of $550,000 from the minority shareholder
of our consolidating subsidiary.



                                      15

<PAGE>   16

        For the nine months ended March 31, 2001, we received $152.9 million
from our financing activities. In August 2000, we completed a secondary
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 to the Company approximately $4.8 million. In March 2001, the
company completed another secondary offering of an additional 3,531,026 shares
of class A common for net proceeds of approximately $81.0 million. For the
same period, we received approximately $1.6 million in proceeds from financing
arrangements for computers and other technology and $4.6 million from
facilities financings. These proceeds were partially offset by the repayment
of notes payable and capital lease obligations of approximately $11.0 million.

        We expect our cash on hand, borrowings under technology and facilities
related financing arrangements, expected reimbursements of advances we have
made to charter boards, together with a contemplated working capital credit
facility will be sufficient to meet our working capital needs to operate our
existing business and schools for the next twelve months. The Company's near
term capital needs are generally growth related and are dependent upon the
Company's rate of growth and its mix of independent charter schools versus
contract schools. Independent charter schools usually require us to advance
funds to help charter boards obtain, renovate and complete school facilities.

        Our longer term requirements are for capital to fund operational
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 and additional debt and/or equity offerings. 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.

        On November 8, 2000, a charter board client obtained approximately
$11.4 million of permanent financing secured by certain of their school
facilities. We received $7.3 million from that financing as partial repayment
of outstanding advances related to the improvement of the facilities and a
note for $4.3 million, for the balance of the advance, which is secured by a
second mortgage in the facilities. As part of the financing arrangement, we
have guaranteed $8.6 million of the debt.

        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 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 growth and cash flow do not depend on 100% enrollment.

        Capital expenditures estimated to be incurred during fiscal 2001,
which include estimates for schools opening in the 2000-2001 and 2001-2002
school years, are approximately $80 million, including approximately $29
million for computers and other technology, approximately $20 million for
curriculum materials and approximately $31 million for the purchase and
renovation of real property (including our new corporate headquarters). Our
rate of growth for the 2001-2002 school year, as discussed above, could
increase or decrease these estimates. Also, for more information on the
corporate headquarters project, see below - "We may incur substantial costs if
we are unable to complete our Edison corporate headquarters project" and
"Properties." For the remainder of the current fiscal year, we expect to make
further advances or loans of approximately $26 million to charter board
clients to help secure and renovate school properties. We expect that a
significant portion of these loans will be refinanced through third parties.
We are also implementing enterprise-wide computer and software packages. Such
systems include financial reporting, payroll, purchasing, accounts payable,
human resources and other administrative modules as well as a student data and
school management package. In addition to the amounts discussed above, we
expect expenditures for the software packages, together with related hardware,
implementation costs and other maintenance expenditures, will total
approximately $15 to $20 million through fiscal 2003. Through March 31, 2001,
we have expended approximately $8.5 million and we expect to expend
approximately $2.2 million in the remainder of the current fiscal year.

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 report, including our financial
statements and the related notes.

                                      16

<PAGE>   17


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 five years of 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 the quarter year ended March 31, 2001, our net loss
was $6.5 million. As of March 31, 2001, our accumulated deficit since November
1996, when we converted from a partnership to a corporation, was approximately
$144.8 million. In addition, prior to November 1996, we incurred losses of
approximately $61.8 million, which are reflected in our additional paid-in
capital. We have not yet demonstrated that public schools can be profitably
managed by private companies and we are not certain when we will become
profitable, if at all. Our ability to become profitable will depend upon our
ability to generate and sustain higher levels of both gross site contribution
and total revenue to allow us to reduce central expenses as a percentage of
total revenue. Even if we do achieve profitability, we may not sustain or
increase profitability on a quarterly or annual basis. Failure to become and
remain profitable may adversely affect the market price of our class A common
stock and our ability to raise capital and continue operations.

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

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

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

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

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

        Because the amount of revenue we 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.




                                      17
<PAGE>   18


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 79 schools during the 1999-2000 school year and are
operating 113 schools for the 2000-2001 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 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 hired 46 new
principals and approximately 1,900 new teachers to meet the needs of our new
and existing schools for the 2000-2001 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 principals and teachers in sufficient numbers or
of a sufficient quality, 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. 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>   19



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

        With respect to contract schools, but generally not charter schools,
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 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 obtain 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.

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





                                      19
<PAGE>   20



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. Management agreements representing 12 schools,
accounting for 17.3% of our total revenue for fiscal 2000, will expire at the
end of the 2000-2001 school year, agreements representing 12 schools,
accounting for 13.8% of our total revenue for fiscal 2000, will expire at the
end of the 2001-2002 school year, and agreements representing 28 schools,
accounting for 29.4% of our total revenue for fiscal 2000, will expire at the
end of the 2002-2003 school year. In addition, management agreements
representing 15 schools, accounting for 18.2% of our total revenue for fiscal
2000, 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 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 are 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.

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. Announcements concerning the outcomes of some of these processes
are expected in the near future. These announcements, or press speculation
concerning the outcome of these processes, may adversely affect our stock
price.



                                      20
<PAGE>   21

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.

KSIXTEEN LLC MAY BE UNABLE TO DEVELOP PROPERTIES FOR USE AS CHARTER SCHOOLS

        On July 1, 2000, Ksixteen LLC was formed by Edison, former members of
Edison's real estate department and an outside investor, to develop properties
for use as charter schools. We no longer maintain an internal real estate
function and we expect to rely primarily on Ksixteen to provide real estate
services to our charter board clients. We do not have direct control over
Ksixteen, and it has no operating history and has never developed property as
a separate entity. Any delay in the development of charter school properties
by Ksixteen could prevent us from successfully opening charter schools on
time, which could result in lost charter school management agreements,
financial losses and damage to our reputation. In addition, in the event of a
failure by any of our charter schools to pay fees due Ksixteen for its
services to the charter school, we could be obligated to pay those fees to
Ksixteen.

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

        As of March 31, 2001, we had advanced or lent charter boards $54.6
million to finance the purchase or renovation of school facilities we manage.
We have not charged interest on approximately $15.4 million of these loans and
advances. Approximately $21.0 million of these loans, representing 18 schools,
are uncollateralized or subordinated to a senior lender. Loans to one charter
school of $11.4 million may be accelerated upon termination of the management
agreement with the school. We currently expect to make additional advances of
approximately $26.0 million in the current fiscal year. If these advances or
loans are not repaid when due, our financial results could be adversely
affected.

        While we are currently exploring a variety of financing structures to
assist charter schools in repaying these loans and advances, including
obtaining tax-exempt financing for some of the charter schools, 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. While the charter board is generally responsible for locating
and financing its own school building, the holders of school charters, which
are often non-profit organizations, typically do not have the resources
required to obtain the financing necessary to secure and maintain the school
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 the
necessary financing. For nine of our charter schools, we have entered into a
long-term lease for the school facility which 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 March 31, 2001, our aggregate future lease obligations totalled
$48.7 million, with varying maturities over the next 20 years. In nine of our
charter schools, we have provided some type of permanent credit support for
the school building, typically in the form of loan guarantees or cash
advances. Although the term of these arrangements is coterminous with the term
of the corresponding management agreement, our guarantee does not expire until
the loan is repaid in full. The lenders under these facilities are not
committed to release us from our obligations unless replacement credit support
is provided. The default by any charter school under a credit facility that we
have guaranteed could result in a claim against us for the full amount of the
borrowings. Furthermore, in the event any charter board becomes insolvent or
has its charter revoked, our loans and advances to the charter board may not
be recoverable, which could adversely affect our financial results. As of
March 31, 2001 the amount of loans we had guaranteed totaled $15.2 million. In
addition, we have indemnified a lender to one of our charter schools from





                                      21
<PAGE>   22



any liability or obligations related to the threat or presence of any
hazardous substance at the charter school facility.


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 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. 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.

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


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

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




                                      22
<PAGE>   23



when needed, or if our charter clients are unable to repay our loans and
advances to them, 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 a lot located in the Harlem section of the borough
of Manhattan in New York City for a purchase price of $10 million. We intend
to develop the property in partnership with the Museum of African Art for a
mixed-use project consisting of our corporate headquarters, a charter school
and a museum. We have neither received the necessary zoning approvals for this
project nor completed our environmental review of the site. In addition, we do
not currently have a contract with the Museum of African Art for this project
or an agreement with any party to operate a charter school on that site. We
must also acquire additional property adjacent to the lot to house the entire
project. If we are unable to acquire the additional property, we will be
required to reduce the size of the project.

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 5% of our
total revenue for the nine months ended March 31, 2001. During the same
period, we estimate that funding from other federal and state programs
accounted for an additional 9% 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.

   -   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.

                                      23

<PAGE>   24


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 three 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 intends to appeal
the denial, there can be no assurance that it will ultimately be successful in
doing so. Any failure to receive 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.

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
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 35.5% of our total revenue in fiscal 2000, or $79.6
million, and 36.5% for the nine months ended March 31, 2001, or $97.4 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




                                      24
<PAGE>   25



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 March 31, 2001, our officers and
directors and entities affiliated with them together beneficially own
9,797,996 shares of class A common stock and 1,955,987 shares of class B
common stock. These shares represent approximately 21.8% of the voting power
of the class A common stock, including the ability to elect one of the seven
class A directors; approximately 70.3% of the voting power of the class B
common stock, including the ability to elect three of the four class B
directors; and approximately 36.8% 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, 3,258,964 shares of class A common
stock and 343,236 shares of class B common stock are subject to options
exercisable within 60 days of March 31, 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, H. Christopher Whittle, our President and Chief Executive
Officer and a director, beneficially owns 3,587,647 shares of class A common
stock and 1,226,422 shares of class B common stock. These shares represent
approximately 9.3% of the voting power of the class A common stock;
approximately 46.7% of the voting power of the class B common stock, including
the ability to elect two of the four class B directors; and approximately
20.6% 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, 1,726,029
shares of class A common stock and 189,745 shares of class B common stock are
subject to options exercisable within 60 days of March 31, 2001. Mr. Whittle
and his affiliates also own options not exercisable within 60 days of March
31, 2001 covering 2,716,787 shares of class A common stock and 292,791 shares
of class B common stock. To the extent Mr. Whittle exercises these options,
his voting power will be increased. In addition, if the other holders of class
B common stock sell a significant portion of their class B common stock, the
voting power of Mr. Whittle's class B common stock will further concentrate.
Also, if the other holders of class B common stock reduce their common stock
holdings below a specified threshold, then their class B common stock will
automatically convert into class A common stock, further increasing Mr.
Whittle's voting power. The class B common stock generally converts into class
A common stock upon its transfer. However, shares of class B common stock
transferred to Mr. Whittle do not automatically convert into class A common
stock. Consequently, Mr. Whittle can also increase his voting power by
acquiring shares of class B common stock from other stockholders.

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

        Mr. Whittle and WSI Inc., a corporation controlled by Mr. Whittle,
directly or indirectly own 2,549,271 shares of class A common stock and
1,111,046 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 March 31, 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 current holdings, 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 4,865,837 shares of class A common stock, including shares
subject to options exercisable within 60 days of March 31, 2001. The holdings
of Morgan and its affiliates would then represent 9.4% of the voting power of
the class A common stock and 7.5% of the combined voting power. This would
enable Morgan to exercise greater influence over corporate matters.



                                      25
<PAGE>   26

OUR STOCK PRICE MAY BE VOLATILE

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

   -   variations in our quarterly operating results;

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

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

   -   termination or non-renewal of existing management agreements;

   -   changes in market valuations of similar companies;

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

   -   general stock market volatility.

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

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

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

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

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

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

   -   a prohibition of stockholder action by written consent; and

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

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<PAGE>   27


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We currently have market risk sensitive instruments related to
interest rates. We had outstanding long-term notes payable of $25.5 million at
March 31, 2001. Interest rates on the notes are fixed and range from 10.1% to
20.4% per annum and have terms of 30 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 $110.3 million at March 31,
2001. 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.


                                      27
<PAGE>   28


PART II -- OTHER INFORMATION

ITEM 1. 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, Las Vegas,
Nevada and Peoria, Illinois questioning the authority of these schools
districts to enter into management agreements with us. In addition, the school
district of York, Pennsylvania has appealed the decision of the Charter
Appeals Board, an entity created by operation of the state's charter law,
granting 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.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

        None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        None

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

        None

ITEM 5. OTHER INFORMATION

        None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

List of Exhibits

        None

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.


                                      28
<PAGE>   29



                                  SIGNATURES

Pursuant to the requirements 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.

<TABLE>
<S>                             <C>
                                            EDISON SCHOOLS INC.

Date:  May 14, 2001                 /s/     H. Christopher Whittle
                                       ---------------------------------
                                            H. Christopher Whittle
                                            President, Chief Executive Officer and Director

Date:  May 14, 2001                 /s/     Adam Feild
                                       ---------------------------------
                                            Adam Feild
                                            Chief Financial Officer
</TABLE>


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