<PAGE>
                       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 DECEMBER 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)

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

             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 the registrant 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:

                                   51,918,822

  (Number of shares of Class A Common Stock Outstanding as of January 31, 2002)

                                    1,809,191

  (Number of shares of Class B Common Stock Outstanding as of January 31, 2002)
<PAGE>
                               EDISON SCHOOLS INC.
                     INDEX TO QUARTERLY REPORT ON FORM 10-Q
                     FOR THE QUARTER ENDED DECEMBER 31, 2001


<TABLE>
<CAPTION>
                                                                                                        PAGE
                                                                                                        ----

<S>                                                                                                   <C>
PART I. FINANCIAL INFORMATION
         ITEM 1. FINANCIAL STATEMENTS
         Condensed Consolidated Balance Sheets as of December 31, 2001 (unaudited) and
           June 30, 2001 .........................................................................         3
         Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended
           December 31, 2001 and 2000 (unaudited) ................................................         4
         Condensed Consolidated Statements of Cash Flows for the Six Months Ended
           December 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 .....................................................     11-27
         ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ......................        27
PART II. OTHER INFORMATION
                 ITEM 1. LEGAL PROCEEDINGS .......................................................        27
                 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ...............................        27
                 ITEM 3. DEFAULTS UPON SENIOR SECURITIES .........................................        27
                 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .....................        27
                 ITEM 5. OTHER INFORMATION .......................................................        27
                 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ........................................        28
                         SIGNATURES ..............................................................        29
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


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


<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                                        2001         JUNE 30,
                                                                                    (UNAUDITED)       2001
                                                                                     ---------      ---------
<S>                                                                                 <C>             <C>
ASSETS:
Current assets:
   Cash and cash equivalents ...................................................     $  52,615      $  96,195
   Accounts receivable .........................................................        60,569         62,926
   Notes receivable ............................................................        19,364          7,762
   Other  receivables ..........................................................         8,924          8,751
   Other current assets ........................................................         6,468          3,280
                                                                                     ---------      ---------
      Total current assets .....................................................       147,940        178,914

Property and equipment, net ....................................................       124,870        119,216
Restricted cash ................................................................         6,614          8,524
Notes receivable, less current portion .........................................        63,224         53,812
Other  receivables, less current portion .......................................         3,284          4,456
Stockholder notes receivable ...................................................         6,687          9,452
Investment .....................................................................         8,025          7,768
Other assets ...................................................................        23,314         19,069
Goodwill .......................................................................        33,494             --
                                                                                     ---------      ---------

      Total assets .............................................................     $ 417,452      $ 401,211
                                                                                     =========      =========

LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
   Short-term debt .............................................................     $  20,000      $      --
   Current portion of long term debt ...........................................        18,981         17,669
   Accounts payable ............................................................        17,819         19,498
   Accrued expenses ............................................................        23,791         26,903
                                                                                     ---------      ---------
      Total current liabilities ................................................        80,591         64,070

Long term debt, less current portion ...........................................        16,219         21,244
Stockholders' notes payable ....................................................         6,611          6,611
Other liabilities ..............................................................           954            826
                                                                                     ---------      ---------
      Total liabilities ........................................................       104,375         92,751
                                                                                     ---------      ---------

Minority interest in subsidiary ................................................           458            480
                                                                                     ---------      ---------

Common stock:
   Class A common, par value $.01; 150,000,000 shares authorized; 51,793,929 and
       49,249,005 shares issued and outstanding at December 31, 2001 and
       June 30, 2001, respectively .............................................           518            492
   Class B common, par value $.01; 5,000,000 shares authorized; 1,836,178
       and 2,433,126 shares issued and outstanding at December 31, 2001
       and June 30, 2001, respectively .........................................            18             24
Additional paid-in capital .....................................................       496,034        465,938
Unearned stock-based compensation ..............................................        (1,389)        (2,386)
Accumulated deficit ............................................................      (180,008)      (153,599)
Stockholder note and accrued interest receivable ...............................        (2,554)        (2,489)
                                                                                     ---------      ---------
      Total stockholders' equity ...............................................       312,619        307,980
                                                                                     ---------      ---------

      Total liabilities and stockholders' equity ...............................     $ 417,452      $ 401,211
                                                                                     =========      =========
</TABLE>


         The accompanying notes are an integral part of these condensed
                       consolidated financial statements.
<PAGE>
                               EDISON SCHOOLS INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
          FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)



<TABLE>
<CAPTION>
                                                                                             (UNAUDITED)
                                                                           THREE MONTHS ENDED            SIX MONTHS ENDED
                                                                       DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                                                           2001           2000           2001           2000
                                                                        ---------      ---------      ---------      ---------

<S>                                                                    <C>            <C>            <C>            <C>
Net revenue .......................................................     $ 133,342      $ 102,295      $ 230,608      $ 167,086

     Direct site expenses .........................................       113,492         84,942        201,196        145,473
     Administration, curriculum and development ...................        15,737         11,587         32,475         23,704
     Preopening expenses ..........................................         1,471          1,113          5,205          6,348
     Depreciation and amortization ................................         9,881          8,617         17,926         15,661
                                                                        ---------      ---------      ---------      ---------
          Total education and operating expenses ..................       140,581        106,259        256,802        191,186
                                                                        ---------      ---------      ---------      ---------

           Loss from operations ...................................        (7,239)        (3,964)       (26,194)       (24,100)

Other income (expense):
     Interest income ..............................................         2,477          2,592          4,862          5,106
     Interest expense .............................................        (1,557)        (1,241)        (2,968)        (2,434)
     Other ........................................................        (1,795)          (427)        (1,788)          (408)
                                                                        ---------      ---------      ---------      ---------
           Total other ............................................          (875)           924            106          2,264
                                                                        ---------      ---------      ---------      ---------

           Loss from operations before provision for state taxes ..        (8,114)        (3,040)       (26,088)       (21,836)

Provision for state taxes and local taxes .........................          (146)          (151)          (321)          (894)
                                                                        ---------      ---------      ---------      ---------

           Net loss ...............................................     $  (8,260)     $  (3,191)     $ (26,409)     $ (22,730)
                                                                        =========      =========      =========      =========
Per common share data:
     Basic and diluted net loss per share .........................     $   (0.15)     $   (0.07)     $   (0.50)     $   (0.49)
                                                                        =========      =========      =========      =========
     Weighted average shares of common stock outstanding
          used in computing basic and diluted net loss per share...        53,547         47,345         53,334         46,226
                                                                        =========      =========      =========      =========
</TABLE>


              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.
<PAGE>
                               EDISON SCHOOLS INC.
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
               FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                           (UNAUDITED)
                                                                                        2001          2000
                                                                                    --------      --------
<S>                                                                                 <C>           <C>
Cash flows from operating activities:
   Net loss ...................................................................     $(26,409)     $(22,730)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization of property and equipment ..................       17,254        14,006
     Amortization of other costs ..............................................          601           394
     Stock-based compensation .................................................          514         1,059
     Loss on disposal of property and equipment ...............................        1,810           458
     Interest on stockholder note receivable ..................................          (65)         (114)
     Changes in working capital accounts, exclusive of effects of acquisitions.       (6,301)      (20,327)
     Other ....................................................................         (277)          (50)
                                                                                    --------      --------
          Cash used in operating activities ...................................      (12,873)      (27,304)
                                                                                    --------      --------

Cash flows from investing activities:
   Additions to property and equipment ........................................      (18,246)      (36,375)
   Proceeds from disposition of property and equipment, net ...................           --         1,074
   Proceeds from notes receivable and advances due from charter schools .......        9,437         7,547
   Notes receivable and advances due from charter schools .....................      (30,442)      (20,932)
   Investment in unconsolidated entity ........................................           --           (35)
   Cash from minority investee ................................................           --           550
   Business acquisitions, net .................................................       (3,287)           --
   Other assets ...............................................................       (2,106)          499
                                                                                    --------      --------
          Cash used in investing activities ...................................      (44,644)      (47,672)
                                                                                    --------      --------

Cash flows from financing activities:
   Borrowings under line of credit ............................................       20,000            --
   Proceeds from issuance of stock and warrants ...............................        1,177        83,302
   Costs in connection with equity financing ..................................           --        (5,089)
   Proceeds from notes payable ................................................           --         5,864
   Payments on notes payable and capital leases ...............................       (9,623)       (6,865)
   Restricted cash ............................................................        2,383        (2,330)
                                                                                    --------      --------
          Cash provided by financing activities ...............................       13,937        74,882
                                                                                    --------      --------

Decrease in cash and cash equivalents .........................................      (43,580)          (94)

Cash and cash equivalents at beginning of period ..............................       96,195        52,644
                                                                                    --------      --------

Cash and cash equivalents at end of period ....................................     $ 52,615      $ 52,550
                                                                                    ========      ========

Supplemental disclosure of cash flow information:
          Cash paid during the period for:
               Interest .......................................................     $  2,712      $  2,434
               Taxes ..........................................................     $    304

Supplemental disclosure of non-cash investing and financing activities:
   Property and equipment acquired under capitalized lease obligations ........     $  5,910         8,138
   See note 8 for information on business acquisitions
   Additions to property and equipment included in accounts payable ...........     $    307      $ 10,343
   Additions to other assets included in accounts payable .....................                   $  2,694
</TABLE>


         The accompanying notes are an integral part of these condensed
                       consolidated financial statements.
<PAGE>
                               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 accounting
principles generally accepted in the United States of America ("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, 2001.

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

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

2.       DESCRIPTION OF BUSINESS

         The Company manages elementary and secondary public schools under
contracts with school districts and charter school boards located in 22 states
and Washington, D.C. The Company opened its first four schools in the fall of
1995, and, as of December 31, 2001, is operating 136 schools with approximately
75,000 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 the
related financing. As compensation for its services, the Company receives
revenues which approximate, on a per pupil basis, the average per pupil spending
of the school district in which the school is located.

3.       RECENTLY ISSUED ACCOUNTING STANDARDS

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

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


                                       6
<PAGE>
4.       NET LOSS PER SHARE

         In accordance with Statement of Financial Accounting Standards 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
month and six month periods ended December 31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                            (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
                                                          THREE MONTHS ENDED          SIX MONTHS ENDED
                                                        DECEMBER      DECEMBER      DECEMBER      DECEMBER
                                                          2001          2000          2001          2000
                                                        --------      --------      --------      --------

<S>                                                     <C>           <C>           <C>           <C>
Net Loss ..........................................     $ (8,260)     $ (3,191)     $(26,713)     $(22,730)
                                                        ========      ========      ========      ========

Class A Common Stock outstanding at beginning
   of period ......................................       51,160        43,949        49,249        39,558
Class B Common Stock outstanding at beginning
   of period ......................................        2,181         3,349         2,433         3,448
Add:
Issuance of Class A Common Stock
  (on a weighted average basis) ...................          551            74         2,249         3,346
Issuance (conversion) of Class B Common Stock
  (on a weighted average basis) ...................         (345)          (27)         (597)         (126)
                                                        --------      --------      --------      --------

Weighted average shares of common stock outstanding
   used in computing basic net loss per share .....       53,547        47,345        53,334        46,226
                                                        ========      ========      ========      ========
Basic and fully diluted net loss per share ........     $  (0.15)     $  (0.07)     $  (0.50)     $  (0.49)
                                                        ========      ========      ========      ========
</TABLE>



5.       CREATION OF EDISON RECEIVABLES COMPANY LLC

         On October 3, 2001, the Company formed Edison Receivables Company LLC
("Edison Receivables"), a wholly owned consolidated entity. Edison Receivables
was established for the purpose of purchasing and financing certain receivables
from the Company.

In November 2001, Edison Receivables entered into a $35.0 million revolving
credit agreement with Merrill Lynch Mortgage Capital Inc. which will be
collateralized by eligible receivables purchased. The line of credit has a term
of one year. Interest may be determined on a Eurodollar or prime rate basis at
the Company's option and is subject to financial covenants and restrictions. The
Company has agreed to pay a commitment fee of .50% per annum on the unused
portion of the commitment. As of December 31, 2001, $20.0 million was
outstanding under this line bearing interest at LIBOR plus 1.25% and was
collateralized by receivables with a book value of $61.1 million.


                                       7
<PAGE>
6.       CREATION OF ALVA INC.

         On October 9, 2001, the Company formed Alva Inc. ("Alva"), a wholly
owned consolidated entity. Alva was established to facilitate the purchase of
proprietary educational based software which was purchased on November 2, 2001.

7.       CREATION OF BAYARD RUSTIN CHARTER SCHOOL, LLC

         On December 11, 2001, the Company formed Bayard Rustin Charter School,
LLC ("Bayard Rustin"), a wholly owned consolidated entity. Bayard Rustin was
established for the purpose of purchasing land in the state of Florida to be
used to develop a charter school facility. The land was purchased on December
19, 2001.

8.       BUSINESS COMBINATIONS

         Effective July 1, 2001, the Company acquired the remaining 65%
outstanding equity interest of Ksixteen, LLC not already owned by it for
approximately $260,000 in cash, giving it 100% ownership and enhanced
operational efficiencies. The acquisition was accounted for under the purchase
method. The purchase price exceeded the fair value of net assets acquired by
approximately $806,000, which will be recorded as goodwill and assessed for
impairment in accordance with SFAS 141 and 142.

         Effective July 3, 2001 the Company acquired by merger 100% of the
outstanding shares of LearnNow, Inc. as a means to enhance its growth prospects.
The acquisition was accounted for under the purchase method and included a cash
payment of $3.0 million and approximately $29.4 million in Company stock
(1,360,954 shares valued based on a ten day average closing price). In
connection with the acquisition, the Company assumed liabilities of $2.1 million
(primarily accrued expenses, payables and accrued personnel costs); acquired
assets of $1.4 million (primarily restricted cash, note receivable and other
assets); and incurred acquisition costs of $2.0 million. The allocation of the
purchase price resulted in recorded intangibles of approximately $35.0 million.
Of this amount, LearnNow contracts of approximately $2.5 million are classified
as an intangible asset separate from goodwill and is being amortized over 10
years on a straight-line basis. The balance is classified as goodwill and
assessed for impairment in accordance with SFAS 141 and 142.

         As of December 31, 2001 the carrying amount of the intangible asset was
$2,375,000, net of accumulated amortization of $125,000. Amortization expense
for the quarter ended December 31, 2001 was $62,500. The aggregate amortization
expense for the five succeeding fiscal years will be $250,000 annually.

         At December 31, 2001, there has been no change in the carrying amount
of goodwill and no amount is deductible for tax purposes.

         The following selected pro forma information for the six months ended
December 31, 2000 is being provided to present a summary of the combined results
of the Company giving effect to the purchase accounting adjustments as if the
acquisitions had occurred as of July 1, 2000. The unaudited pro forma
information is for informational purposes only and may not necessarily reflect
the results of operations of Edison Schools had the acquired businesses operated
as a part of the Company for the six months ended December 31, 2000.


<TABLE>
<CAPTION>
PRO FORMA INFORMATION
(in thousands, except per share data)       EDISON SCHOOL  ACQUIRED ENTITIES      CONSOLIDATED
-------------------------------------       -------------  -----------------      ------------

<S>                                         <C>            <C>                    <C>
Net revenue ............                     $ 167,086       $   7,717            $ 174,813
Net loss ...............                       (22,730)         (5,313)             (28,043)
Loss per common share
       Basic and diluted                                                              (0.61)
</TABLE>


                                       8
<PAGE>
9.       STOCK-BASED COMPENSATION

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


10.      NOTES RECEIVABLE

         The Company provides financing in the form of interest and non-interest
bearing loans and advances to charter school boards to assist in the purchase or
renovation of charter school facilities. Certain of the loans are evidenced by
notes and other advances which are made in concert with a management contract or
without fixed repayment terms. While loans are typically structured to be repaid
over as long as twenty years, in an effort to obtain prepayment, the Company
generally assists charter school boards in obtaining third party lender
financing. Often third party financing requires the Company to guarantee loans
on behalf of these charter schools. A default by any charter school under a
credit facility that is guaranteed by the Company may result in a claim against
the Company for the full amount of the borrowings.

         The Company, on an ongoing basis, reviews historical operations
of the charter  schools. Based on the historical operations, the Company
believes that the  charter boards have the ability to repay the loan
obligations as they become  due. Where there is evidence that the charter
boards may not have the ability  to repay the loans, the Company writes down
the amount of the loan to an amount  the Company believes is recoverable. While
the Company has not needed to record  a write down for any of these loans, the
Company provides no assurance that  future charter school operations will
continue to generate sufficient cash  flows to support the debt obligations.

         Of the approximately $82.6 million of notes and other financing at
December 31, 2001, approximately $64.7 million was collateralized and the $17.9
million balance was uncollateralized and in some cases subordinated to other
senior debt. Of the approximately $61.6 million in notes and other financing,
net at June 30, 2001, approximately $41.8 million was collateralized and the
$19.8 million balance was uncollateralized and in some cases subordinated to
other senior debt. Should the Company be required to foreclose on the
collateral securing these loans, it may not be able to liquidate the collateral
for proceeds sufficient to cover the loans.


         Notes receivable consist of the following:

<TABLE>
<CAPTION>
                                            DECEMBER 31, 2001        JUNE 30, 2001
                                            -----------------        -------------
                                                      (IN THOUSANDS)

<S>                                         <C>                      <C>
Notes receivable due from charter schools       $82,588                  $48,617
Other financing due from charter schools             --                   12,957
                                                -------                  -------
                                                 82,588                   61,574
Less, current portion ...................        19,364                    7,762
                                                -------                  -------
   Total notes receivable ...............       $63,224                  $53,812
                                                =======                  =======
</TABLE>

11.      COMMITMENTS AND CONTINGENCIES

LONG TERM LEASE OBLIGATIONS

         The Company has entered into various non-cancelable operating leases
for office space and currently leases school sites. These leases expire at
various dates through the year 2020. 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:


                                       9
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR          LEASE OBLIGATIONS
-----------          -----------------
                     (IN THOUSANDS)
<S>                  <C>
2002                 $ 1,585
2003                   3,110
2004                   3,011
2005                   2,821
2006                   3,028
Thereafter            37,400
                     -------
                     $50,955
                     -------
</TABLE>



         In the event of non-renewal or termination, the Company retains the
right to sub-lease the property to another tenant. We have one client,
representing $14.3 million of the above obligations, where we do not expect to
manage its schools after the current school year. The Company believes, based on
our review of historical operations and the essential nature of the property,
that the charter board will continue to be able to meet its lease obligations to
the Company.

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 December 31, 2001, to ACS for $1 if (i) ACS
raises $2.0 million by June 30, 2002 and (ii) if (a) the Company fails either to
raise or contribute $405,000 from sources outside of the Dayton, Ohio area by
May 31, 2002, 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 December 31, 2001, the aggregate termination benefits of the
executives and certain other employees approximated $5.6 million.

GUARANTEES

         The Company has guaranteed certain debt obligations of charter school
boards with which it has management agreements. As of December 31, 2001, the
Company had provided guarantees totaling approximately $21.3 million. The debt
obligations mature from November 2001 to November 2005. As of December 31, 2001,
the charter school boards are current on their repayment of debt obligations.
All covenants as guarantor have been met.

         The Company has guaranteed a certain debt obligation of a charter
board, with which it has a management agreement, for $2.4 million which matures
in May 2004. The charter board was in default as of June 30, 2001, due to
non-compliance with a covenant that requires the charter board to maintain all
bank accounts with the lender's bank. This instance of non-compliance was cured
on September 28, 2001, and all debt obligations of the charter school board are
current.

         The Company has an agreement to indemnify a charter board lender from
any liability or obligations related to the presence of any hazardous substance
at a charter school site. The Company does not expect that any sums it may have
to pay


                                       10
<PAGE>
in connection with this liability would have a materially adverse effect on its
consolidated financial position, or results of operation for fiscal 2002.

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 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 75,000 students in 136 schools
located in 22 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 December 31, 2001, our accumulated deficit
since November 1996 was approximately $180.0 million. In addition, prior to
November 1996, we incurred losses of approximately $61.8 million, which are
reflected in our additional paid-in capital. Because of our rapid growth, and in
view of the evolving nature of our business and our limited operating history,
we believe that period-to-period comparisons of our operating results may not be
meaningful.

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

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

      -     Initial staff training and professional development;

      -     Technology, including laptop computers for teachers;

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

      -     Upgrades in facilities.


                                       11
<PAGE>
REVENUE

         Our revenue is principally derived from contractual relationships to
manage and operate contract and charter schools. 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 become known at the beginning of the school year and
generally tend not to vary significantly throughout the year. For these
reasons, our revenue for each school year is largely predictable at the
beginning of the school year.

         We are responsible to our clients for all aspects of the management of
our schools including but not limited to the: academic achievement of our
students; selection, training and compensation of school personnel; procurement
of curriculum and equipment necessary for operations of the school; and the
safe operation of our school facilities. We often purchase certain essential
services, such as transportation and food service, from third parties and/or
from our clients. In addition, we generally arrange for teachers in our
contract schools to be paid by clients on our behalf.  Where such arrangements
exist, the client deducts the amounts they have expended on our behalf from the
amount owed to us when remitting payment. Following the guidance of EITF 99-19,
we believe we are the primary obligor and have the contractual obligation to
provide these services.  Accordingly, we record revenue and expenses related to
these activities on a gross basis.

         In addition, for the six months ended December 31, 2001, revenues
representing 2.1% of total revenues were generated through after-school program
fees and food service costs.

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.

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


                                       12
<PAGE>
improvements. These investments support the Edison curriculum and school design
and relate directly to our provision of educational services. The depreciation
and amortization of investments in our central office is also included.

ENROLLMENT

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

RESULTS OF OPERATIONS

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

         Net Revenue. Our net revenue increased to $133.3 million for the three
months ended December 31, 2001 from $102.3 million for the same period of the
prior year, an increase of 30.3%. The increase was primarily due to a 31.6%
increase in student enrollment from 57,000 in the 2000-2001 school year to
75,000 in the 2001-2002 school year, reflecting both the opening of new schools
and the expansion of existing schools.

         Direct Site Expenses. Our direct site expenses increased to $113.5
million for the three months ended December 31, 2001 from $84.9 million for the
same period of the prior year, an increase of 33.7%. Similar to the increase in
revenue from educational services, the increase in direct site expenses was
primarily due to the 31.6% increase in student enrollment. The largest element
of direct site expenses is personnel costs. Personnel costs included in direct
site expenses increased to $88.6 million for the three months ended December 31,
2001 from $67.3 million for the same period of the prior year.

         Gross Site Contribution and Margin. Our gross site contribution was
$19.9 million for the three month period ended December 31, 2001 compared to
$17.4 million for the same period of the prior year. The corresponding gross
site margin decreased to 14.9% for the three months ended December 31, 2001 from
17.0% for the same period of the prior year. The decrease in gross site margin
was due to more rapidly growing direct site costs than revenue, primarily as a
result of disappointing results for one of our new clients in fiscal 2002.

         Administration, Curriculum and Development Expenses. Our
administration, curriculum and development expenses increased to $15.7 million
for the three months ended December 31, 2001 from $11.6 million for the same
period of the prior year, an increase of 35.3%. The increase was substantially
due to greater personnel costs resulting from an increase of approximately 73
headquarters employees, which reflects a substantial increase in staff in our
school operations and curriculum and education divisions and an increase in our
central office administrative staff to enhance legal, contracting, and financial
reporting functions. In addition, the increase is also impacted by a vendor
rebate in the prior period.

         Pre-opening Expenses. Our pre-opening expenses increased to $1.5
million for the three months ended December 31, 2001 from $1.1 million for the
same period of the prior year, an increase of 36.4%. The increase is a result of
the timing of training for professional development.

         Excluding non-cash stock-based compensation charges of $241,000,
administration, curriculum and development and pre-opening expenses as a
percentage of revenues increased to 12.7% for three months ended December 31,
2001 from 11.7% for the prior year.

         Depreciation and Amortization. Our depreciation and amortization
increased to $9.9 million for the three months ended December 31, 2001 from $8.6
million for the same period of the prior year, an increase of 15.1%. The
increased depreciation and amortization resulted from additional capital
expenditures for our curriculum materials, computers and related technology, and
facility improvements related to our enrollment and central office growth.

         Education and Operating Expenses. Our total education and operating
expenses as a percentage of total revenue increased to 105.4% for three months
ended December 31, 2001 from 103.9% for the same period of the prior year. This
increase, which resulted from an increase in direct site expenses as a
percentage of total revenue offset by a decrease in


                                       13
<PAGE>
depreciation and amortization expense as a percentage of total revenue.

         EBITDA, Net of Other Charges. EBITDA, net of other charges, means the
net loss we would have shown if we did not take into consideration our interest
expense, income tax expense, depreciation and amortization, and stock-based
compensation charges. These costs are discussed above. This amount for the three
months ended December 31, 2001 was $2.9 million compared to $5.4 million for the
same period of the prior year. The decreased EBITDA resulted primarily from
decreased gross site margin and an increase in administration, curriculum and
development, and pre-opening expenses as a percentage of revenues. On a
per-student basis, EBITDA declined to $38 in three months ended December 31,
2001 compared to $94 for the same period of the prior year.

         Other Income and Expense. Other expense, net was $875,000 for the three
months ended December 31, 2001 compared to income of $924,000 in the same period
of the prior year. The decrease was due to less interest income resulting from
lower invested cash balances, offset by increased interest expense from expanded
borrowings, and a charge related to disposal of certain fixed assets.

         Net Loss. Our net loss increased to $8.3 million for the three months
ended December 31, 2001 from $3.2 million for the same period of the prior year.

THE SIX MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THE SIX MONTHS ENDED DECEMBER
31, 2000

         Net Revenue. Our net revenue increased to $230.6 million for the six
months ended December 31, 2001 from $167.1 million for the same period of the
prior year, an increase of 38.0%. The increase was primarily due to a 31.6%
increase in student enrollment from 57,000 in the 2000-2001 school year to
75,000 in the 2001-2002 school year, reflecting both the opening of new schools
and the expansion of existing schools. Additionally, a $3.3 million and $2.7
million increase resulted from revenue recognized from our summer school program
and a consulting engagement, respectively.

         Direct Site Expenses. Our direct site expenses increased to $201.2
million for the six months ended December 31, 2001 from $145.5 million for the
same period of the prior year, an increase of 38.3%. Similar to the increase in
revenue from educational services, the increase in direct site expenses was
primarily due to the 31.6% increase in student enrollment. The largest element
of direct site expenses is personnel costs. Personnel costs included in direct
site expenses increased to $156.7 million for the six months ended December 31,
2001 from $116.6 million for the same period of the prior year.

         Gross Site Contribution and Margin. Our gross site contribution was
$29.4 million for the six month period ended December 31, 2001 compared to $21.6
million for the same period of the prior year. The corresponding gross site
margin decreased to 12.8% for the six months ended December 31, 2001 from 12.9%
for the same period of the prior year. The decrease in gross site margin was due
to more rapidly growing direct site costs than revenue, primarily as a result of
disappointing results for one of our new clients in fiscal 2002. The gross site
contribution and margin were favorably impacted by $2.7 million of revenue from
a consulting engagement. Excluding this consulting revenue, gross site margin
would have decreased to 11.7%.

         Administration, Curriculum and Development Expenses. Our
administration, curriculum and development expenses increased to $32.5 million
for the six months ended December 31, 2001 from $23.7 million for the same
period of the prior year, an increase of 37.1%. The increase was substantially
due to greater personnel costs resulting from an increase of approximately 73
headquarters employees, which reflects a substantial increase in staff in our
school operations and curriculum and education divisions and an increase in our
central office administrative staff to enhance legal, contracting, and financial
reporting functions. In addition, we incurred expenses relating to our
consulting engagement.

         Pre-opening Expenses. Our pre-opening expenses decreased to $5.2
million for the six months ended December 31, 2001 from $6.3 million for the
same period of the prior year, a decrease of 17.5%. This decrease was associated
primarily with opening new schools for the 2001-2002 school year, with
approximately 18,000 new students enrolled, of which approximately 2,000
students were from existing LearnNow schools, compared to approximately 19,500
new students enrolled in the prior school year.

         Excluding non-cash stock-based compensation charges of $514,000,
administration, curriculum and development and pre-opening expenses as a
percentage of revenues decreased to 16.1% for six months ended December 31, 2001
from 17.4% for the prior year.


                                       14
<PAGE>
         Depreciation and Amortization. Our depreciation and amortization
increased to $17.9 million for the six months ended December 31, 2001 from $15.7
million for the same period of the prior year, an increase of 14.0%. The
increased depreciation and amortization resulted from additional capital
expenditures for our curriculum materials, computers and related technology, and
facility improvements related to our enrollment and central office growth.

         Education and Operating Expenses. Our total education and operating
expenses as a percentage of total revenue decreased to 111.4% for six months
ended December 31, 2001 from 114.4% for the same period of the prior year. This
decrease primarily resulted from a decrease in preopening and depreciation and
amortization expenses as a percentage of total revenue.

         EBITDA, Net of Other Charges. EBITDA, net of other charges, means the
net loss we would have shown if we did not take into consideration our interest
expense, income tax expense, depreciation and amortization, and stock-based
compensation charges. These costs are discussed above. This amount for the six
months ended December 31, 2001 was a negative $7.8 million compared to a
negative $7.4 million for the same period of the prior year. The decreased
EBITDA resulted primarily from a decrease in gross site margin offset by
decreased administration, curriculum and development, and pre-opening expenses
as a percentage of revenues. On a per-student basis, negative EBITDA improved to
$103 in six months ended December 31, 2001 compared to $129 for the same period
of the prior year.

         Other Income and Expense. Other income, net was $106,000 for the six
months ended December 31, 2001 compared to $2.3 million in the same period of
the prior year. The decrease was due to less interest income resulting from
lower invested cash balances, offset by increased interest expense from expanded
borrowings, and a charge related to disposal of certain fixed assets.

         Net Loss. Our net loss increased to $26.4 million for the six months
ended December 31, 2001 from $22.7 million for the same period of the prior
year, an increase of 16.3%.

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. We have or intend to enter into debt financing arrangements to
finance a substantial portion of our expenditures during fiscal 2002. Although
we have successfully obtained necessary financing in the past, there can be no
assurance that we will be able to do so, or on favorable terms, in the future.

         In November 2001, we obtained a $35 million revolving credit facility
with Merrill Lynch. The financing provides for certain receivables to be sold or
contributed to a wholly-owned special purpose company, Edison Receivables
Company LLC, which can draw on the credit line to fund the purchases. The line
of credit has a term of one year. Interest may be determined on a Eurodollar or
prime rate basis at our option and is subject to financial covenants and
restrictions. We have agreed to pay a commitment fee of .50% per annum on the
unused portion of the commitment. We have drawn down $20.0 million on this
facility as of December 31, 2001.

         For the six months ended December 31, 2001, we used approximately $12.9
million for operating activities. This use primarily resulted from $26.4 million
of net loss and a $6.3 million net increase in working capital accounts
partially offset by depreciation and amortization totaling $17.9 million and a
disposal of certain fixed assets totaling $1.8 million.

         For the six months ended December 31, 2001, we used approximately $44.6
million in investing activities. During this period, we invested approximately
$18.2 million in our schools and central office. This amount includes the
investments we made in technology and curriculum in each of the schools we
opened. We have also advanced funds to our charter board clients or their
affiliates to help obtain, renovate and complete school facilities. The amounts
advanced for the six months ended December 31, 2001 were approximately $30.4
million. During this same period, we also received approximately $9.4 million in
repayments on advances previously made. The Company invested approximately $3.3
million in LearnNow and Ksixteen in connection with the acquisitions. Also, the
Company invested approximately $2.1 million in other assets.


                                       15
<PAGE>
         For the six months ended December 31, 2001, we received approximately
$13.9 million for our financing activities. This increase resulted primarily
from borrowing $20.0 million on our credit facility and approximately $2.4
million release of restricted cash, offset by the repayment of notes payable and
capital lease obligations of approximately $9.6 million.

         We expect our cash on hand, borrowings under our revolving credit
facility, and borrowings under financing arrangements to finance technology and
facilities-related expenditures together with expected reimbursements of
advances we have made to charter boards, will be sufficient to meet our working
capital needs to operate our existing schools through fiscal 2002. 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 charter schools and contract schools, as
charter schools usually require us to advance funds to help charter boards
obtain, renovate and complete school facilities. Our current growth plans for
2002-2003 school year will require us to obtain additional funding.

         Our longer term requirements are for capital to fund operating losses,
capital expenditures related to growth and for anticipated working capital needs
and general corporate purposes. We expect to fund such expenditures and other
longer term liquidity needs with cash generated from operations, the proceeds
from offerings of debt or equity securities and expanded financing arrangements.
Depending on the terms of any financing arrangements, such funding may be
dilutive to existing shareholders, and we cannot be certain that we will be able
to obtain additional financing on favorable terms, if at all. In general, our
ability to achieve positive cash flow will be dependent on the volume of schools
with positive gross site contribution to offset central office and overhead
expenses.

         Capital expenditures for fiscal 2002 are currently expected to be
approximately $50.0 million, which includes approximately $25.0 million for
computers and other technology at our schools, approximately $10.0 million for
curriculum materials, approximately $5.0 million for the purchase and
improvement of property at our schools, and $10.0 million for technology,
leasehold improvements, and other capital items at our headquarters.
Additionally, we expect to make additional advances or loans approximating $45.0
million to new charter board clients to help secure and renovate school
properties during the 2001-2002 school year, a portion of which we expect will
be refinanced through third parties. In addition, we expect to make charitable
donations of approximately $6.0 million to benefit two of our clients.

ADDITIONAL RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

         We opened our first schools and recorded our first revenue in fiscal
1996. As a result, we have only a six-year 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 ended December 31, 2001, our net loss was $8.3
million. As of December 31, 2001, our accumulated deficit since November 1996,
when we converted from a partnership to a corporation, was approximately $180.0
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.


                                       16
<PAGE>
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.
We have also had several lawsuits filed against us by parties challenging the
involvement of for-profit companies in the management of public schools in their
school districts. 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. Some of
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.

         In the future we may provide consulting services to school districts,
such as the contract we are currently seeking with the Philadelphia school
district. We cannot assure you that we can deliver consulting services
successfully or profitably. As a consultant, we would not have control over
day-to-day operations in the schools as we do under our typical management
agreements in other jurisdictions. Although the district would have no
obligation to implement our program, or to accept any proposals we may make,
public opinion may nonetheless hold us accountable for the overall performance
of the schools throughout the district. If overall academic performance in the
district were to decline or fail to improve, our reputation could be harmed,
which would make it harder for us to win other business in the future.

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

         Because the amount of revenue we receive for operating each school
primarily depends on the number of students enrolled, and because many facility
and on-site administrative costs are fixed, achieving site-specific enrollment
objectives is an important factor in our ability to achieve satisfactory
financial performance at a school. We may be unable to recruit enough students
to attend all grades in our new schools or maintain enrollment at all grades in
our existing schools. We sometimes do not have enough students to fill some
grades in some schools, particularly the higher grades. It is sometimes more
difficult to enroll students in the higher grades because older students and
their parents are reluctant to change schools. To the extent we are unable to
meet or maintain enrollment objectives at a school, the school will be less
financially successful and our financial performance will be adversely affected.

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

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


                                       17
<PAGE>
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 31 new principals
and approximately 1,700 new teachers to meet the needs of our new and existing
schools for the 2001-2002 school year. Currently, there is a well-publicized
nationwide shortage of teachers and other educators in the United States. In
addition, we may find it difficult to attract and retain principals and teachers
for a variety of reasons, including the following:

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

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

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

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

WE 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 or management
agreements for a relatively large number of schools in a single school district,
such as Philadelphia. 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.

         One of our strategies is to seek contracts to manage large clusters of
schools in a single school district, such as the arrangement we are pursuing in
Philadelphia. The financial and organizational challenges we may encounter
managing large clusters of schools are likely to be more complex than those we
have faced to date and our financial performance could suffer as a result.


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

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

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

         Union cooperation at the local level is often critical to us in
obtaining new management agreements and maintaining existing management
agreements. In those school districts where applicable, provisions of collective
bargaining agreements must typically be modified in areas such as length of
school day, length of school year, negotiated compensation policies and


                                       18
<PAGE>
prescribed methods of evaluation in order to implement the Edison design at a
contract school. We regularly encounter resistance from local teachers' unions
during school board debates over whether to enter into a management agreement
with us. In addition, local teachers' unions have occasionally initiated
litigation challenging our management agreements. If we fail to achieve and
maintain cooperative relationships with local teachers' unions, we could lose
business and our ability to grow could suffer, which could adversely affect the
market price of our class A common stock. In addition, at the national level,
the American Federation of Teachers and the National Education Association have
substantial financial and other resources that could be used to influence
legislation, local teachers' unions and public opinion in a way that would hurt
our business.

WE COULD BE LIABLE FOR EVENTS THAT OCCUR AT OUR SCHOOLS

         We could become liable for the actions of principals, teachers and
other personnel in our schools. In the event of on-site accidents, injuries or
other harm to students, we could face claims alleging that we were negligent,
provided inadequate supervision or were otherwise liable for the injury. We
could also face allegations that teachers or other personnel committed child
abuse, sexual abuse or other criminal acts. In addition, if our students commit
acts of violence, we could face allegations that we failed to provide adequate
security or were otherwise responsible for their actions, particularly in light
of recent highly publicized incidents of school violence. Although we maintain
liability insurance, this insurance coverage may not be adequate to fully
protect us from these kinds of claims. In addition, we may not be able to
maintain our liability insurance in the future at reasonable prices or at all. A
successful liability claim could injure our reputation and hurt our financial
results. Even if unsuccessful, such a claim could cause unfavorable publicity,
entail substantial expense and divert the time and attention of key management
personnel, which could cause our financial result to suffer.

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

         Our management agreements generally have a term of five years. When we
expand by adding an additional school under an existing management agreement,
the term with respect to that school generally expires at the end of the initial
five-year period. We have limited experience in renewing management agreements,
and we cannot be assured that any management agreements will be renewed at the
end of their term. Of the 11 management agreements that have come up for renewal
at the end of the last two school years, two have not been renewed. In addition,
a management agreement covering two schools and due to expire at the end of the
2004-2005 school year was terminated early, at the end of the 2000-2001 school
year. Six management agreements representing 13 schools, accounting for 12.5% of
our total revenue for fiscal 2001, will expire at the end of the 2001-2002
school year. Renewals of four of these agreements are being negotiated, and we
do not expect to renew the remaining two. Twelve management agreements
representing 28 schools, accounting for 20.2% of our total revenue for fiscal
2001, will expire at the end of the 2002-2003 school year. In addition,
management agreements representing 17 schools, accounting for 13.6% of our total
revenue for fiscal 2001, are terminable by the school district or charter board
at will, with or without good reason, and all of our management agreements may
be terminated for cause, including in some cases a failure to meet specified
educational standards, such as academic performance based on standardized test
scores. In addition, as a result of payment disputes or changes within a school
district, such as changes in the political climate, we do from time to time face
pressure to permit a school district or charter board to terminate our
management agreement even if they do not have a legal right to do so. We may
also seek the early termination of, or not seek to renew, a limited number of
management agreements in any year. It is likely that each year some management
agreements will expire unrenewed or be terminated prior to expiration. If we do
not renew a significant number of management agreements at the end of their
term, or if management agreements were terminated prior to their expiration, our
reputation and financial results would be adversely affected.

OUR MANAGEMENT AGREEMENTS INVOLVE FINANCIAL RISK

         Under our management agreements, we agree to operate a school in return
for 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.


                                       19
<PAGE>
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. Any announcements or
press speculation concerning the outcomes of these processes may adversely
affect the market price of our class A common stock.

         We have also submitted our qualifications to directly manage and
provide consulting services to schools in the Philadelphia school district. No
contracts for these schools have been awarded and we do not know with any
certainty when the selection decisions will be made. We have encountered
significant political and legal resistance from individuals and groups who
oppose the involvement of for-profit companies in the management of, and the
provision of consulting services to, schools in the district. Some of these
opponents, including the Philadelphia Federation of Teachers, have filed
lawsuits in various Pennsylvania courts seeking to enjoin the execution of any
contracts whereby we would provide consulting services to the Philadelphia
school district or manage schools in the district. While these plaintiffs'
applications for preliminary injunctive relief have been denied by the courts
thus far, we can provide no assurance that these plaintiffs, or other new
opponents, will not ultimately be successful in obtaining a judgment preventing
us from entering into consulting or management contracts with the Philadelphia
school district. Furthermore, we can provide no assurance that we will win any
consulting or management contracts with the Philadelphia school district and our
failure to do so could disappoint investors' expectations and adversely affect
the market price of our class A common stock.

         Because we have focused a significant amount of our management and
sales efforts in the past several months on Philadelphia, we have not pursued
other business as aggressively as we otherwise might have. Accordingly, if we do
not win as many schools in Philadelphia as we hope, it may be more difficult for
us to meet our growth and financial targets for the 2002-2003 school year.

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. 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.


                                       20
<PAGE>
WE HAVE ADVANCED AND LOANED MONEY TO CHARTER SCHOOL BOARDS THAT MAY NOT BE
REPAID

         As of December 31, 2001, we have outstanding loans or advances to
charter boards of $82.6 million to finance the purchase or renovation of school
facilities we manage. Approximately $17.9 million of these loans are
uncollateralized or subordinated to a senior lender. In addition, with respect
to the loans that are collateralized, if we were required to foreclose on the
collateral securing those loans, we might not be able to liquidate the
collateral for proceeds sufficient to cover the loan amount. We have a loan
outstanding for approximately $9.0 million to one client where we do not expect
to manage its schools after the current school year. If any of these advances or
loans are not repaid when due, our financial results could be adversely
affected.

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

WE COULD BECOME LIABLE FOR FINANCIAL OBLIGATIONS OF CHARTER BOARDS

         We could have facility financing obligations for charter schools we no
longer operate, because the terms of our facility financing obligations for some
of our charter schools exceeds the term of the management agreement for those
schools. For nine of our charter schools, we have entered into a long-term lease
for the school facility that exceeds the current term of the management
agreement by as much as 15 years. If our management agreements were to be
terminated, or not renewed in these charter schools, our obligations to make
lease payments would continue, which could adversely affect our financial
results. It is likely that, with respect to one of our charter school clients
where we have entered into a long-term lease, the management agreement will not
be renewed at the end of the current school year. Although we believe this
client will continue to use the facility and will be able and willing to pay us
rent equal to our cost, we cannot provide any assurances in this regard. As of
December 31, 2001, our aggregate future lease obligations totaled $51 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. 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 December 31, 2001 the amount of loans we had
guaranteed totaled $21.3 million and the cash collateral provided totaled $0.5
million and is included in restricted cash. In addition, we have generally
indemnified our charter school and contract school partners from any liability
or damages occurring or allegedly occurring or arising out of any environmental
conditions at the school site, if such conditions were caused or created by
substances brought on the site by Edison.


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

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

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

      -     We recognize revenue for each school pro rata over the 11 months
            from August through June, and, except for revenue related to our
            summer school programs, we recognize no school revenue in July. Most
            of our site costs are recognized over the 11 months from August
            through June. For this reason, the first quarter of our fiscal year


                                       21
<PAGE>
            has historically reflected less revenue and lower expenses than the
            other three quarters, and we expect this pattern to continue.

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

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

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

WE EXPECT OUR MARKET TO BECOME MORE COMPETITIVE

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

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

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

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

         We have purchased property in New York, New York for the purchase price
of $10 million, and have entered into an agreement with the Museum of African
Art to develop the property for a mixed use project consisting of our new
corporate headquarters, a charter school and a facility to house the Museum. We
do not have an agreement with any party to operate a charter school on that
site. We intend to invest additional amounts in the development and construction
of the site as well as arrange project financing. If we are unable or unwilling
to proceed with the project for any reason, we may be forced to write off our
investment in the project and sell the property, potentially at a loss.


                                       22
<PAGE>
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.
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 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.

IF WE UNDERTAKE ACQUISITIONS, THEY MAY BE EXPENSIVE AND DISRUPTIVE TO OUR
BUSINESS AND COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS AND FUTURE OPERATIONS

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

WE 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, or ESEA, which provides federal
funds for children from low-income families, accounted for approximately 4% of
our total revenue for the fiscal year ended June 30, 2001. During the same
period, we estimate that funding from other federal and state programs accounted
for an additional 10% of our total revenue. A number of factors relating to
these government programs could lead to adverse effects on our business:

      -     These programs have strict requirements as to eligible students,
            allowable activities, academic performance, remedial action, and
            staff qualifications. 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.

      -     With respect to Title I funding, schools receiving such funding who
            fail to make adequate yearly progress over a five-year period, as
            provided by the ESEA, may be required to fundamentally restructure
            the governance structure or academic program at that school.

      -     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.


                                       23
<PAGE>
      -     Most federal education funds are administered through state and
            local education agencies, which allot funds to school boards and
            charter boards. These state and local education agencies are subject
            to extensive government regulation concerning their eligibility for
            federal funds. If these agencies were declared ineligible to receive
            federal education funds, the receipt of federal education funds by
            our school board or charter board clients could be delayed, which
            could in turn delay our payment from our school board and charter
            board clients.

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

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

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

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

         Many of our charter school clients apply for federal tax-exempt status.
One state in which we currently operate seven charter schools and hope to open
additional charter schools in the future requires charter schools to secure
federal tax-exempt status. Any failure to receive or delay in receiving federal
tax-exempt status by a charter school in that 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. If states or the federal government were
to adopt legislation prohibiting for-profit entities from operating public
schools, the market for our services would decline and our business results
could suffer.

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

         Our charter schools operate under a charter that is typically granted
by a state authority to a third-party charter holder, such as a community group
or established non-profit organization. Our management agreement in turn is with
the charter holder. If the state charter authority were to revoke the charter,
which could occur based on actions of the charter holder outside of our control,
we would lose the right to operate that school. In addition, many state charter
school statutes


                                       24
<PAGE>
require periodic reauthorization. Charter schools accounted for 34.3% and 36.6%
of our total revenue in fiscal 2001 and the six months ended December 31, 2001,
respectively. If state charter school legislation were not reauthorized or were
substantially altered in a meaningful number of states, our business and growth
strategy would suffer and we could incur additional losses.

         One of our charter school clients has been placed on probation for a
period of 90 days by the state charter authority. This probationary period
expires in March 2002. If the charter authority were to revoke that client's
charter, we would lose the right to continue to operate that client's schools.
That client accounted for 2.7% of our total revenue in fiscal 2001.

         Charter schools are also subject to rules and regulations adopted by
the state charter authority. If a state charter authority adopts new
regulations, or modifies existing regulations, our ability to manage schools in
that state could be adversely affected. For example, in one state where we
manage four charter schools, the state charter authority requires that charter
schools solicit competitive bids from prospective education managers before
engaging the services of a particular manager. Accordingly, in order for us to
win new charter school management business in that state, and potentially even
to retain the charter management contracts we already have, we would be required
to compete with other interested companies in a bidding process and we can offer
no assurance that we would be successful in winning that process.

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 December 31, 2001, our officers and
directors and entities affiliated with them together beneficially own 10,109,186
shares of class A common stock and 1,866,217 shares of class B common stock.
These shares represent approximately 20.0% of the voting power of the class A
common stock, including the ability to elect one of the seven class A directors;
approximately 76.2% of the voting power of the class B common stock, including
the ability to elect three of the four class B directors; and approximately
35.0% 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, 5,990,301 shares of class A common stock and 612,275
shares of class B common stock are subject to options exercisable within 60 days
of December 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, based upon his holdings as of December 31, 2001, H.
Christopher Whittle, our President and Chief Executive Officer and a director,
beneficially owns 6,491,030 shares of class A common stock and 1,519,206 shares
of class B common stock. These shares represent approximately 13.8% of the
voting power of the class A common stock; including the ability to elect one of
the seven class A directors; approximately 65.5% of the voting power of the
class B common stock, including the ability to elect three of the four class B
directors; and approximately 27.2% 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, 4,629,412 shares of class A common stock and 489,529 shares of
class B common stock are subject to options exercisable within 60 days of
December 31, 2001. Mr. Whittle and his affiliates also own options not
exercisable within 60 days of December 31, 2001 covering 866,738 shares of class
A common stock and 8 shares of class B common stock; to the extent Mr. Whittle
exercises these options, his voting power will be increased. In addition, if the
other holders of class B common stock sell a significant portion of their class
B common stock, the voting power of Mr. Whittle's class B common stock will
further concentrate. Also, if the other holders of class B common stock reduce
their common stock holdings below a specified threshold, then their class B
common stock will automatically convert into class A common stock, further
increasing Mr. Whittle's voting power. The class B common stock generally
converts into class A common stock upon its transfer. However, shares of class B
common stock transferred to Mr. Whittle do not automatically convert into class
A common stock. Consequently, Mr. Whittle can also increase his voting power by
acquiring shares of class B common stock from other stockholders.

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

         Based upon their holdings as of December 31, 2001, Mr. Whittle and WSI
Inc., a corporation controlled by Mr. Whittle, directly or indirectly own
5,452,654 shares of class A common stock and 1,403,830 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


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<PAGE>
include shares issuable upon the exercise of options within 60 days of December
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. Morgan has allowed
Mr. Whittle and WSI to pledge 725,000 shares to other lenders. Upon satisfaction
of WSI's obligations to the other lenders, these shares would revert 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 our knowledge of Morgan's holdings as of
December 31, 2001, and assuming the shares pledged to the other lenders revert
to the Morgan pledge, Morgan, together with its affiliates who are currently
securityholders of Edison, would beneficially own 6,952,928 shares of class A
common stock, including shares subject to options exercisable within 60 days of
December 31, 2001. The holdings of Morgan and its affiliates would then
represent 12.0% of the voting power of the class A common stock and 11.1% of the
combined voting power. This would enable Morgan to exercise greater influence
over corporate matters.

OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE

         The trading price of our 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. Our stock price may increase or
decrease in response to a number of events and factors including:

      -     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;


                                       26
<PAGE>
      -     a prohibition of stockholder action by written consent; and

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


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 $16.2 million at December
31, 2001. Interest rates on the notes are fixed and range from 9.4% to 20.4% per
annum and have terms of 36 to 48 months.

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

    Additionally, we do not have significant exposure to changing interest rates
on invested cash, which was approximately $52.6 million at December 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.

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

         The Company is involved in various legal proceedings from time to time
incidental to the conduct of its business. The Company currently believes that
any ultimate liability arising out of such proceedings will not have a material
adverse effect on its 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

         On December 18, 2001, the Company amended the employment agreement of
H. Christopher Whittle, the Company's Chief Executive Officer. In consideration
of the reduction of his cash compensation to $1 per year, Mr. Whittle was
awarded an option to acquire 1,000,000 shares of the Company's class A common
stock at $25 per share. Of the shares covered by this option, 200,000 were
immediately vested and the remaining shares vest ratably over a 30 month period
ending June 30, 2004. Additionally, on January 8, 2002, Mr. Whittle was awarded
an option to acquire 800,000 shares of the Company's class A common stock at $25
per share. Of the shares covered by this option, 100,000 were immediately vested
and the remaining shares vest ratably over a 30 month period ending June 30,
2004.

         On February 13, 2002, the Company and Benno C. Schmidt Jr., the
Company's Chairman, agreed to extend two notes owed to the Company by Mr.
Schmidt until June 15, 2002. The current balance on these notes, including
outstanding interest, is approximately $3.0 million.


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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.


Exhibits:

        Exhibit 10.1:   1999 Stock Incentive Plan, As Amended.

        Exhibit 10.2:   Letter Agreement, dated as of December 18, 2002, between
                        the Registrant and H. Christopher Whittle.

        Exhibit 10.3:   Allonges dated as of February 13, 2002, to promissory
                        notes, dated as of June 5, 1992 and January 23, 1996,
                        from Benno C. Schmidt, Jr. to the Registrant.

Reports on Form 8-K:

         None


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<PAGE>
                                   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.


                                            EDISON SCHOOLS INC.

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

Date February 14,  2001                 /s/ Adam Feild
                                           ------------------------------------
                                            Adam Feild
                                            Executive Vice President and Chief
                                            Financial Officer (Principal
                                            Accounting Officer)


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