<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 MARCH 31, 2002

                                       OR

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

                        FOR THE TRANSITION PERIOD FROM TO

                        COMMISSION FILE NUMBER 000-27817

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

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
  the preceding 12 months (or for such shorter period that 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:

                                   52,008,748

   (Number of shares of Class A Common Stock Outstanding as of April 30, 2002)

                                    1,805,132

   (Number of shares of Class B Common Stock Outstanding as of April 30, 2002)
<PAGE>
                               EDISON SCHOOLS INC.
                     INDEX TO QUARTERLY REPORT ON FORM 10-Q
                      FOR THE QUARTER ENDED MARCH 31, 2002

<TABLE>
<CAPTION>
                                                                                                                 PAGE
                                                                                                                 ----
<S>                                                                                                             <C>
PART I. FINANCIAL INFORMATION
         ITEM 1. FINANCIAL STATEMENTS
         Condensed Consolidated Balance Sheets as of March 31, 2002 (unaudited) and
           June 30, 2001(restated) ..........................................................................       3
         Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended
           March 31, 2002 (unaudited) and 2001 (restated for the Three Months) ..............................       4
         Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
           March 31, 2002 and 2001 (unaudited) ..............................................................       5
         Notes to Condensed Consolidated Financial Statements (unaudited) ...................................    6-14
         ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS ................................................................   14-33
         ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .................................      33
PART II. OTHER INFORMATION
         ITEM 1. LEGAL PROCEEDINGS ..........................................................................      33
         ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ..................................................      33
         ITEM 3. DEFAULTS UPON SENIOR SECURITIES ............................................................      33
         ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........................................      33
         ITEM 5. OTHER INFORMATION ..........................................................................      33
         ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...........................................................      33
                 SIGNATURES .................................................................................      35
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

<TABLE>
<CAPTION>
                                                                                                     (UNAUDITED)
                                                                                                                JUNE 30,
                                                                                             MARCH 31             2001
                                                                                               2002             (RESTATED)*
                                                                                             ---------          ---------
<S>                                                                                         <C>                 <C>
ASSETS:
Current assets:
   Cash and cash equivalents .......................................................         $  45,256          $  96,195
   Accounts receivable .............................................................            65,047             62,926
   Notes receivable ................................................................            21,020              7,762
   Other receivables ...............................................................             9,342              8,751
   Other current assets ............................................................             8,136              3,280
                                                                                             ---------          ---------
      Total current assets .........................................................           148,801            178,914

Property and equipment, net ........................................................           118,797            119,216
Restricted cash ....................................................................             5,400              8,524
Notes receivable, less current portion .............................................            67,168             53,812
Other  receivables, less current portion ...........................................             1,117              4,456
Stockholder notes receivable .......................................................             6,755              9,452
Investment .........................................................................             1,250              7,768
Other assets .......................................................................            31,752             19,069
Goodwill ...........................................................................            32,521                 --
                                                                                             ---------          ---------

      Total assets .................................................................         $ 413,561          $ 401,211
                                                                                             =========          =========

LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
   Short-term debt .................................................................         $  20,000          $      --
   Current portion of long term debt ...............................................            18,381             17,669
   Accounts payable ................................................................            16,074             19,498
   Accrued expenses ................................................................            41,915             30,000
                                                                                             ---------          ---------
      Total current liabilities ....................................................            96,370             67,167

Long term debt, less current portion ...............................................            13,721             21,244
Stockholders' notes payable ........................................................             6,611              6,611
Other liabilities ..................................................................             1,019                826
                                                                                             ---------          ---------
      Total liabilities ............................................................           117,721             95,848
                                                                                             ---------          ---------

Minority interest in subsidiary ....................................................               437                480
                                                                                             ---------          ---------

Common stock:
   Class A common, par value $.01; 150,000,000 shares authorized; 51,996,552
       and 49,249,005 shares issued and outstanding at March 31, 2002
       and June 30, 2001, respectively .............................................               520                492
   Class B common, par value $.01; 5,000,000 shares authorized; 1,805,132
       and 2,433,126 shares issued and outstanding at March 31, 2002
       and June 30, 2001, respectively .............................................                18                 24
Additional paid-in capital .........................................................           497,959            465,341
Unearned stock-based compensation ..................................................            (1,147)            (2,386)
Accumulated deficit ................................................................          (199,367)          (156,099)
Stockholder note and accrued interest receivable ...................................            (2,580)            (2,489)
                                                                                             ---------          ---------
      Total stockholders' equity ...................................................           295,403            304,883
                                                                                             ---------          ---------

      Total liabilities and stockholders' equity ...................................         $ 413,561          $ 401,211
                                                                                             =========          =========
</TABLE>
----------------------
* See Note 2


         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 NINE MONTHS ENDED MARCH 31, 2002 AND 2001
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                                   (UNAUDITED)
                                                                                   THREE MONTHS ENDED         NINE MONTHS ENDED
                                                                                               MARCH 31,
                                                                                 MARCH 31,       2001       MARCH 31,    MARCH 31,
                                                                                   2002       (RESTATED)*     2002          2001
                                                                                 ---------     --------     ---------     ---------
<S>                                                                              <C>          <C>           <C>          <C>
Gross student funding (Note 5)...............................................    $ 131,165     $ 99,604     $ 361,774     $ 266,690
                                                                                 =========     ========     =========     =========

    Net revenue .............................................................    $ 121,904     $ 92,815     $ 327,286     $ 248,652

    Direct site expenses:
         Company paid .......................................................       50,161       41,359       142,043       115,444
         Client paid ........................................................       49,994       33,373       134,395        94,957
    Administration, curriculum and development ..............................       21,485       14,763        53,960        38,467
    Pre-opening expenses ....................................................          402          639         5,608         6,987
    Depreciation and amortization ...........................................        9,776        9,297        27,388        24,289
                                                                                 ---------     --------     ---------     ---------
              Total education and operating expenses ........................      131,818       99,431       363,394       280,144
                                                                                 ---------     --------     ---------     ---------

               Loss from operations .........................................       (9,914)      (6,616)      (36,108)      (31,492)

    Other income (expense):
         Interest income ....................................................        2,527        2,153         7,390         7,259
         Interest expense ...................................................       (1,446)      (1,358)       (4,414)       (3,792)
         Other (Note 12) ....................................................       (7,512)          16        (9,301)         (392)
                                                                                 ---------     --------     ---------     ---------
               Total other ..................................................       (6,431)         811        (6,325)        3,075
                                                                                 ---------     --------     ---------     ---------

    Loss before provision for taxes .........................................      (16,345)      (5,805)      (42,433)      (28,417)

    Provision for state taxes and local taxes ...............................         (514)        (177)         (835)         (864)
                                                                                 ---------     --------     ---------     ---------

                Net loss ....................................................    $ (16,859)    $ (5,982)    $ (43,268)    $ (29,281)
                                                                                 =========     ========     =========     =========
    Per common share data:
          Basic and diluted net loss per share ..............................    $   (0.31)    $  (0.13)    $   (0.81)    $   (0.63)
                                                                                 =========     ========     =========     =========
          Weighted average shares of common stock outstanding
                used in computing basic and diluted net loss per share ......       53,771       47,794        53,477        46,831
                                                                                 =========     ========     =========     =========
</TABLE>
-----------------
*  See Note 2


             The accompanying notes are an integral part of these
                  condensed consolidated financial statements.
<PAGE>
                               EDISON SCHOOLS INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE NINE MONTHS ENDED MARCH 31, 2002 AND 2001
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                               (UNAUDITED)
                                                                                                           2002              2001
                                                                                                        --------          ---------
<S>                                                                                                     <C>               <C>
Cash flows from operating activities:
   Net loss ...................................................................................         $(43,268)         $ (29,281)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization of property and equipment ..................................           26,419             22,881
     Amortization of other costs ..............................................................              866                710
     Stock-based compensation .................................................................              755              1,451
     Loss on disposal of property and equipment ...............................................            2,569                457
     Interest on stockholder note receivable ..................................................              (91)              (149)
     Equity loss and impairment of investment in unconsolidated entities ......................            6,518                 --
     Net changes in working capital accounts, exclusive of effects of acquisitions ............           (6,784)           (22,540)
     Other ....................................................................................              (31)              (195)
                                                                                                        --------          ---------
          Cash used in operating activities ...................................................          (13,047)           (26,666)
                                                                                                        --------          ---------

Cash flows from investing activities:
   Additions to property and equipment ........................................................          (16,507)           (43,485)
   Proceeds from disposition of property and equipment, net ...................................               --              1,074
   Proceeds from notes receivable and advances due from charter schools .......................           11,674             10,149
   Notes receivable and advances due from charter schools .....................................          (38,245)           (37,403)
   Investment in unconsolidated entity ........................................................               --                (35)
   Cash from minority investee ................................................................               --                550
   Business acquisitions, net .................................................................           (3,116)                --
   Other assets ...............................................................................           (2,767)               577
                                                                                                        --------          ---------
          Cash used in investing activities ...................................................          (48,961)           (68,573)
                                                                                                        --------          ---------

Cash flows from financing activities:
   Borrowings under line of credit ............................................................           20,000                 --
   Proceeds from issuance of stock and warrants ...............................................            1,811            172,081
   Costs in connection with equity financing ..................................................               --            (11,146)
   Proceeds from notes payable ................................................................               --              6,178
   Payments on notes payable and capital leases ...............................................          (14,340)           (10,972)
   Restricted cash ............................................................................            3,598             (3,206)
                                                                                                        --------          ---------
              Cash provided by financing activities ...........................................           11,069            152,935
                                                                                                        --------          ---------

(Decrease)/Increase in cash and cash equivalents ..............................................          (50,939)            57,696

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

Cash and cash equivalents at end of period ....................................................         $ 45,256          $ 110,340
                                                                                                        ========          =========

Supplemental  disclosure of cash flow information:
Cash paid during the period for:
               Interest .......................................................................         $  4,025          $   4,058
               Taxes ..........................................................................         $    712

Supplemental disclosure of non-cash investing and financing activities:
   Property and equipment acquired under capitalized lease obligations ........................         $  7,530             17,278
   Additions to property and equipment included in accounts payable ...........................         $  4,279          $   1,881
   Additions to other assets included in accounts payable .....................................                           $   2,694
   See note 10 for information on business acquisitions
</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, loss on school contract,
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 the
Company's fiscal year has historically reflected less revenue and lower expenses
than the other three quarters. The Company generally has a lower gross site
margin in the first fiscal quarter than in the remaining fiscal quarters. The
Company also recognizes 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.       RESTATEMENT

      On May 14, 2002, Edison Schools concluded and resolved a confidential
informal inquiry of its accounting practices and policies undertaken by the
staff of the Securities and Exchange Commission ("SEC"). The SEC order agreed
to by the Company in connection with the resolution of the informal inquiry
does not result in the restatement of any revenue or operating results ("loss
from operations and net loss") previously reported in the Company's audited
financial statements included in the Company's Annual Report on Form 10-K for
the year ended June 30, 2001. (See Footnote 5 regarding the requirement to
retroactively reclassify its statements of operations by offsetting previously
reported revenues against expenses of equal amounts pursuant to the adoption of
EITF 01-14, "Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred.") These reclassifications do not change
previously reported losses from operations and net losses. Additionally, in
connection with the SEC inquiry, the Company undertook a comprehensive review
of its accounting and determined the need to restate the operating results for
the unaudited first and third quarters of fiscal 2001 and to restate certain
items of its balance sheets, audited and unaudited, to properly reflect certain
liabilities and equity and to record deferred compensation earned in fiscal
year prior to June 30, 1998.

      In fiscal 2001, the Company concluded that two of its client contracts
would lose money for the remainder of their contract terms. The Company, which
had been recognizing these losses as incurred, determined it was appropriate to
recognize all of the estimated losses (approxiamately $2.4 million) expected
over the remainder of the contracts' terms in the first quarter of 2001 when
such estimates losses first became reasonably estimable. Accordingly, the
Company restated the first quarter of fiscal 2001 primarily to record losses
expected for the remainder of their contract terms on these two client
contracts. In addition, the Company included in the restated first quarter of
fiscal 2001 certain reclassifications and other previously unrecorded
offsetting amounts; such items primarily related to the reversal of excess
accrued liabilities (approximately $700,000) and fixed asset costs
(approximately $1.0 million) that should have more properly been capitalized.
The impact of these net adjustments on the first and third quarters of fiscal
2001 was to increase the net loss in the first fiscal quarter of 2001 by
$600,000 and decrease the net loss in the third quarter of 2001 by a similar
amount. The Company and its auditors intend to discuss with the SEC's Division
of Corporate Finance modifications made to the unaudited fiscal 2001 interim
financial statements prior to filing any amended Forms 10-Q for the affected
periods. The Company's balance sheet presented herein as of June 30, 2001 and
the unaudited interim financial statements for the three months and nine months
ended March 31, 2001 have been restated from amounts previously reported to
reflect the items discussed in this footnote. As soon as practicable, the
Company intends to file an amended Form 10-K for the fiscal year ended June 30,
2001, as well as Forms 10-Q for those interim periods for that fiscal year, to
reflect these restatements and the reclassifications discussed in footnote 4
and 5.

      The effects of the restatement and reclassifications on the specific line
items of the unaudited consolidated statement of operations for the three and
nine months ended March 31, 2001 were as follows:

<TABLE>
<CAPTION>
                                                              THREE MONTHS                    NINE MONTHS
                                                                ENDED                           ENDED
                                                            MARCH 31, 2001                  MARCH 31, 2001
                                                              (UNAUDITED)                    (UNAUDITED)
                                                    -----------------------------   -----------------------------
                                                    AS ORIGINALLY                   AS ORIGINALLY
                                                       REPORTED      AS PRESENTED      REPORTED      AS PRESENTED
                                                       --------      ------------   -------------    ------------
<S>                                                 <C>              <C>            <C>              <C>
Direct site expenses, before any
  reclassification against revenue (see Note 5)        $ 82,042        $ 81,521        $227,515        $228,439
Depreciation and amortization .................           9,345           9,297          25,006          24,289
Provision for taxes ...........................              --              --           1,071             864
Net loss ......................................           6,551           5,982              --              --
</TABLE>


      As mentioned above, as a result of the comprehensive review of the
Company's historical financial statements by the Company and its independent
auditor, which concluded May 2002, the Company determined the need to restate
the prior years amended balance sheets for certain transactions. The
restatements are the result of changes to the accounting treatment for a
severance arrangement with Benno C. Schmidt, Jr., Chairman of the Board of
Directors and a warrant agreement with D2F2, a philanthropic organization as
follows:


                                       6
<PAGE>
      In 1992, the Company entered into an initial severance arrangement with
Benno C. Schmidt, Jr. that required the Company to make a severance payment in
the event he terminated his employment with the Company for any reason other
than death. The Company has disclosed the material terms of the severance
arrangement, including the amount of the severance payment, in its filings with
the SEC. In the past, the Company accounted for this arrangement as a contingent
liability and disclosed the amount in the footnotes to the Company's financial
statements. The Company now believes that the full amount of the severance
should have been accrued upon execution of the agreement. Accordingly, the
impact on prior years' balance sheets to reflect this liability and decrease
shareholders' equity was $2.5 million, $2.5 million, $3.2 million and $3.2
million at June 30, 1998, 1999, 2000, and 2001, respectively. In addition, the
Company reversed an accrual of $700,000 determined to be unnecessary at June 30,
2000. The Company has not paid any amounts pursuant to this severance agreement
and Mr. Schmidt remains employed by the Company. Subsequent to March 31, 2002,
Mr. Schmidt waived the right to receive the severance amount unless his
employment is terminated without cause or he terminates his employment for good
reason. Accordingly, the Company expects to reduce liabilities and increase
additional paid-in capital by $3.2 million in the quarter ending June 30, 2002.

      In 1998 the Company sold, to D2F2 Foundation, a warrant to purchase
approximately 1.9 million shares of Edison's common stock in exchange for
aggregate cash proceeds of $2.5 million. This amount was received and properly
recorded as restricted cash in the Company's financial statements. The warrant
proceeds were required to be used by Edison to provide services to selected
schools, as approved from time to time by the philanthropic organization during
the five years following the agreement's execution. Under the terms of the
warrant, if the full amount of the cash proceeds were not to have been spent by
Edison during the five-year period, Edison would be required to return
unexpended amounts, and a pro rata portion of the warrant (or shares already
issued under the warrant, if applicable) could be canceled or redeemed at
Edison's option at their issuance price. The warrant was described in the
Company's SEC filings. The Company now believes that the warrant proceeds were
incorrectly accounted for as equity on the Company's balance sheet in prior
periods rather than being reported as liability until the purchase price was no
longer subject to return. As of March 31, 2002, the current liability related to
the warrant is less than $600,000. If the remaining $600,000 of restricted cash
is used to provide approved services to the selected schools as intended, the
liability will be reduced from $600,000 to $0. Edison's restated balance sheets
will reflect a liability of approximately $2.5 million, $1.6 million, $1.2
million and $600,000 at June 30, 1998, 1999, 2000, and 2001, respectively for
this matter.


      The table below details the effect on the June 30, 2001 balance sheet for
these items:

<TABLE>
<CAPTION>
                                       June 30, 2001
                               As Originally
                                  Reported      As Restated
                                  --------        --------
<S>                            <C>              <C>
Accrued Expenses                  $ 26,903        $ 30,000
Additional paid-in capital         465,938         465,341
Accumulated deficit                153,599         156,099
</TABLE>

3.    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 March 31, 2002, is operating 133 schools with approximately
74,000 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 earns gross
student funding comparable to the funding spent on other public schools in the
school district in which the school is located.

4.    RECENTLY ISSUED ACCOUNTING STANDARDS

      In January 2002, the Emerging Issues Task Force ("EITF") issued EITF 01-14
"Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred." EITF 01-14 clarifies EITF 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent," that provides guidance on
whether revenues should be presented gross or net of certain costs. After
consultation with its independent auditors, the Company believes that EITF 01-14
should be interpreted to require it to present as revenue and expense only those
direct site expenses that the Company is primarily obligated to pay.



                                       7
<PAGE>
In accordance with the transition provisions of EITF 01-14, the Company adopted
EITF 01-14 effective January 1, 2002 and has reclassified all historical periods
to conform with the new presentation (see table below) and, in the interest of
transparency, added a "Gross student funding" line to its statement of
operations. Edison contracts with districts and charter boards to operate public
schools and under such contracts Edison is entitled to funding from local, state
and federal sources, including Title I and special educational funding, which
represents gross student funding. Gross student funding is not revenue as
defined by GAAP and represents the gross contractual funding for the Company's
schools before all expenses.

      In November 2001, the EITF issued EITF 01-09, "Accounting for
Consideration Given by a Vendor to a Customer". EITF 01-09 addresses the
appropriate income statement characterization of consideration given by a vendor
to a customer, specifically whether that consideration should be presented in
the vendor's income statements as a reduction of revenue or as an expense. The
Company determined that consideration given to two customers was, in effect, an
adjustment of the Company's contract price and should be accounted for as a
reduction in revenue rather than as an expense subsequent to the promulgation of
EITF 01-09. In accordance with the transition provisions of EITF 01-09, the
Company adopted EITF 01-09 effective January 1, 2002 and has reclassified all
historical periods (see table below) to conform with the new presentation.

      The reclassification effects of EITF 01-14, EITF 01-09 and other
immaterial reclassifications on the Company's prior period financial statements
is as follows:

<TABLE>
<CAPTION>
                                     THREE MONTHS    NINE MONTHS
                                        ENDED           ENDED
                                       MARCH 31,       MARCH 31,            YEARS ENDED JUNE 30,
                                     ------------     -----------   -----------------------------------
                                         2002            2001        2001          2000         1999
                                      ---------       ---------    ---------    ---------    ---------
<S>                                   <C>             <C>          <C>          <C>          <C>
Revenue, as previously reported ...   $ 131,165       $ 266,690    $ 375,818    $ 224,578    $ 132,762
   Reclassifications ..............      (9,261)        (18,038)     (25,310)     (15,606)      (7,677)
                                      ---------       ---------    ---------    ---------    ---------
Net revenue .......................   $ 121,904       $ 248,652    $ 350,508    $ 208,972    $ 125,085
                                      =========       =========    =========    =========    =========
</TABLE>

      In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 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 SFAS 142, goodwill and
indefinite-lived intangibles need to be reviewed for impairment at least
annually. In addition, the amortization period of intangible assets with finite
lives will no longer be limited to forty years. The Company adopted SFAS 142
effective July 1, 2001.

5.    REVENUE RECOGNITION

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

      The Company is generally responsible to its clients for all aspects of the
management of its schools including but not limited to the: academic achievement
of the students; selection, training and compensation of school personnel;
procurement of curriculum and equipment necessary for operations of the school;
and the safe operation of the school facilities. Gross student funding
represents the gross contractual funding for our schools before all costs. Net
revenue represents gross student funding less costs that we are not primarily
obligated to pay. The Company follows the guidance of EITF 99-19 and EITF 01-14
regarding classification of revenues. Specifically, the Company recognizes
revenues net of expenses that the Company is not primarily obligated to pay. For
the three months and nine months ended March 31, 2002 and 2001, the difference
between gross student funding and net revenues consisted of the following costs
for which the Company is not primarily obligated to pay:


                                       8
<PAGE>
<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED               NINE MONTHS ENDED
                                                        MARCH 31,        MARCH 31,      MARCH 31,        MARCH 31,
                                                           2002            2001            2002             2001
                                                        ---------        ---------      ---------        ---------
<S>                                                     <C>              <C>            <C>              <C>
Gross student funding ...........................       $ 131,165        $ 99,604       $ 361,774        $ 266,690
   Personnel costs ..............................          (1,462)         (2,440)        (10,672)          (4,559)
   Non-personnel costs* .........................          (7,799)         (4,349)        (23,816)         (13,479)
                                                        ---------        --------       ---------        ---------
Net revenue .....................................       $ 121,904        $ 92,815       $ 327,286        $ 248,652
                                                        =========        ========       =========        =========
</TABLE>

* Includes expenses related to services such as facility maintenance, utilities,
student transportation, and others for which we are not primarily obligated to
pay.

      In many instances, the teachers and other personnel in the Company schools
are paid through the clients' payroll systems. Where such arrangements exist,
the amounts expended for salaries and other compensation costs for the schools
are generally deducted from the amount owed to the Company when payment is made.
These amounts are disclosed as "Direct site expenses - client paid" on the
Company's statements of operations.

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

6.    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 nine month periods ended
March 31, 2002 and 2001 are as follows:


                                       9
<PAGE>
<TABLE>
<CAPTION>
                                                                                 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
                                                                               THREE MONTHS ENDED           NINE MONTHS ENDED
                                                                           MARCH 31,       MARCH 31,    MARCH 31,       MARCH 31,
                                                                             2002            2001         2002            2001
                                                                             ----            ----         ----            ----
<S>                                                                        <C>             <C>          <C>             <C>
Net loss ...........................................................       $(16,859)       $ (5,982)    $(43,268)       $(29,281)
                                                                           ========        ========     ========        ========

Class A Common Stock outstanding at beginning
   of period .......................................................         51,794          44,078       49,249          39,558
Class B Common Stock outstanding at beginning
   of period .......................................................          1,836           3,322        2,433           3,448
Add:
Issuance of Class A Common Stock
  (on a weighted average basis) ....................................            172           1,277        2,423           4,834
Issuance (conversion) of Class B Common Stock
  (on a weighted average basis) ....................................            (31)           (883)        (628)         (1,009)
                                                                           --------        --------     --------        --------

Weighted average shares of common stock outstanding
   used in computing basic net loss per share ......................         53,771          47,794       53,477          46,831
                                                                           ========        ========     ========        ========
Basic and fully diluted net loss per share .........................       $  (0.31)       $  (0.13)    $  (0.81)       $  (0.63)
                                                                           ========        ========     ========        ========
</TABLE>

7.    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 March 31, 2002, $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 $49.8 million.

8.    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.

9.    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.


                                       10
<PAGE>
10.   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 was recorded as goodwill and is being assessed for impairment in
accordance with SFAS 141 and 142.

      Effective July 3, 2001 the Company acquired 100% of the outstanding shares
of LearnNow, Inc. as a means to enhance its growth prospects. During the third
quarter of fiscal 2002, the Company finalized its determination of the purchase
price and the allocation thereof. The acquisition was accounted for under the
purchase method and included a cash payment of $3.0 million and approximately
$31.3 million in Company stock (approximately 1.3 million shares). In connection
with the acquisition, the Company assumed liabilities of $2.1 million (primarily
accrued expenses, payables and accrued personnel costs); acquired tangible
assets of $1.7 million (primarily restricted cash, account receivable, note
receivable and other assets); and incurred acquisition costs of $1.5 million.
The allocation of the purchase price resulted in recorded intangibles of
approximately $36.2 million. Of this amount, LearnNow contracts of approximately
$4.5 million are classified as an intangible asset separate from goodwill and is
being amortized over 15 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 March 31, 2002 the carrying amount of the intangible asset was
$4,251,250, net of accumulated amortization of $223,750. Amortization expense
for the quarter ended March 31, 2002 was $74,583. The aggregate amortization
expense for the five succeeding fiscal years will be $298,333 annually.

      At March 31, 2002, 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 nine months ended
March 31, 2001 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 nine months ended March 31, 2001.


<TABLE>
<CAPTION>
PRO FORMA INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)                      EDISON SCHOOLS   ACQUIRED ENTITIES    CONSOLIDATED
-------------------------------------                      --------------   -----------------    ------------
<S>                                                        <C>              <C>                  <C>
Net revenue ....................................             $ 248,652          $ 11,707            $ 260,359
Net loss .......................................               (29,281)           (9,256)             (38,537)
Loss per common share
       Basic and diluted .......................                                                        (0.82)
</TABLE>

11.   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.


                                       11
<PAGE>
12.   INVESTMENTS

      During the third quarter of fiscal 2002, the Company recorded a non-cash
charge to reduce the carrying value of its 19.7% cost basis investment in
privately-held Apex Learning, Inc. to reflect an other-than-temporary decline
in value of $6.8 million (representing the excess of carrying value over fair
value, which results in a carrying value of $1.3 million as of March 31, 2002).
Apex is a company that provides interactive advanced placement courses for high
school students over the internet. We determined that our investment was
impaired given the terms of a third quarter fiscal 2002 transaction involving
Apex equity instruments between two existing investors. Management assessed
this impairment to be other than temporary based on the sharp decline in fair
value as determined and in consideration of the overall market condition for
private equity companies. Prior thereto, the Company had concluded there was
not an other than temporary impairment based, in part, on its application of
customary valuation techniques which indicated that fair value approximated
carrying value. Among the key assumptions included in the valuation were market
conditions for educational related companies, trends in Apex operating results
and valuations of market comparables.


13.   PHILANTHROPY

      The Company has entered into an agreement with one of its clients whereby
it committed to raise $10.5 million in unrestricted philanthropic funds, to be
contributed over a two year period ending June 30, 2003. The funds are to be
used for schools the Company manages and are to be expended on agreed upon costs
including school facility, technology, curriculum material, etc. To date the
Company has secured commitments from two philanthropic organizations to
contribute approximately $3.9 million and commitments from two senior Company
officers for an additional $1.2 million. The Company will amortize its
commitment, net of third party donations received, over the contract life (5
years) as a reduction in revenue in accordance with EITF 01-09. Contributions
received from senior officers will serve to reduce the Company's obligation and
be credit to additional paid-in capital.

14.   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 $88.2 million of notes and other financing at March
31, 2002, approximately $68.7 million was collateralized and the $19.5 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>
                                                                     MARCH 31, 2002        JUNE 30, 2001
                                                                     --------------        -------------
                                                                                 (IN THOUSANDS)
<S>                                                                  <C>                   <C>
         Notes receivable due from charter schools .........              $88,188              $48,617
         Other financing due from charter schools ..........                   --               12,957
                                                                          -------              -------
                                                                           88,188               61,574
         Less, current portion .............................               21,020                7,762
                                                                          -------              -------
            Total notes receivable .........................              $67,168              $53,812
                                                                          =======              =======
</TABLE>


                                       12
<PAGE>


15.   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:

<TABLE>
<CAPTION>
FISCAL YEAR      LEASE OBLIGATIONS
-----------      -----------------
                 (in thousands)
<S>              <C>
2002              $   827
2003                3,242
2004                3,039
2005                2,821
2006                3,028
Thereafter         37,441
                  -------
                  $50,398
                  =======
</TABLE>

      In the event of non-renewal or termination, the Company retains the right
to sub-lease the property to another tenant. The Company has one client,
representing $14.0 million of the above obligations, where the Company does not
expect to manage its schools after the current school year. The Company
believes, based on its 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 Alliance Facility Management
("AFM"), a party related to 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 March 31, 2002, to ACS for $1 if (i) AFM 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. As of March 31, 2002, Edison had not secured any significant contributions
and AFM had secured cash contributions of approximately $1.6 million. The
Company is currently pursuing discussions to restructure the contingent
obligation, however, there can be no assurances that such discussions will
reduce the Company's potential obligation under the Funding Agreement.

LITIGATION

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

EMPLOYMENT AGREEMENTS

      The Company has entered into employment agreements with certain of its
executives. Such agreements may be terminated by either the executive or the
Company at any time and provide, among other things, certain termination
benefits. As of March 31, 2002, the aggregate termination benefits of the
executives was $2.3 million. Additionally, at March 31, 2002, the Company has
accrued $3.2 million related to postemployment benefits as noted in footnote 2.


                                       13
<PAGE>
GUARANTEES

      The Company has guaranteed certain debt obligations of charter school
boards with which it has management agreements. As of March 31, 2002, the
Company had provided guarantees totaling approximately $21.8 million. The debt
obligations mature from June 2003 to November 2005. As of March 31, 2002, 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 $2.2 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 in connection with this liability would have a materially adverse effect on
its consolidated financial position, or results of operation for fiscal 2002.


16.   SUBSEQUENT EVENTS

      As of May 15, 2002, at least three law firms had announced the filing in
the United States District Court for the Southern District of New York of class
action lawsuits against the Company and several of its officers on behalf of
investors who purchased the Company's securities from November 11, 1999 through
May 14, 2002. The lawsuits purportedly allege securities law violations under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder relating to the Company's financial reporting. The complaints in
these lawsuits have not yet been served on the Company and the Company has not
yet had a chance to substantively review the complaints. The Company intends to
vigorously defend these lawsuits. However, there can be no assurance that the
Company will be successful, and an adverse resolution of the lawsuits could
have a material adverse effect on the Company's financial position and results
of operations in the period in which the lawsuits are resolved. The Company is
not presently able to reasonably estimate potential losses, if any, related to
the lawsuits. Such litigation could also substantially divert the attention of
the Company's management and its resources in general. Uncertainties resulting
from the initiation and continuation of any litigation or other proceedings
could harm the Company's ability to compete in its marketplace.


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.

      On May 14, 2002, the U.S. Securities and Exchange Commission issued an
Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C,
Making Finding, and Imposing a Cease-and-Desist Order pursuant to a settlement
Offer made by the Company. The SEC order was the result of a confidential
informal inquiry instituted by the SEC in February 2002 into the Company's
accounting policies and procedures. The SEC order concludes the inquiry by the
SEC's Enforcement Division. Edison and our independent auditors intend to
discuss with SEC's Corporation Finance Division modifications made to the
unaudited financial statements prior to filing any amendments to our interim
reports on Form 10-Q.


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 gross student 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 74,000 students in 133 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 March 31, 2002, our accumulated deficit since
November 1996 was approximately $199.4 million. In addition, prior to

                                       14
<PAGE>
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.

GROSS STUDENT FUNDING

      Gross student funding represents the gross contractual funding for our
schools before all expenses. The difference between gross student funding and
net revenues consisted of costs for which Edison is not primarily obligated to
pay.

      Gross student funding is not revenue as defined by generally accepted
accounting principals.

NET REVENUE

      Revenues are principally earned from contractual relationships to manage
and operate contract and charter schools. We also earn revenue from summer
school and after-school program fees. We recognize revenue for each managed
school pro rata over the eleven months from August through June, typically the
period over which we perform our services, in accordance with Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements."

      We are generally 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 the school facilities. Gross student funding
represents the gross contractual funding for our schools before all costs. Net
revenue represents gross student funding less costs that we are not primarily
obligated to pay. We follow the guidance of EITF 99-19 and EITF 01-14 regarding
classification of revenues. Specifically, we recognize revenue net of expenses
that we are not primarily obligated to pay.

      In many instances, the teachers and other personnel in our schools are
paid through the clients' payroll systems. Where such arrangements exist, the
amounts expended for salaries and other compensation costs for our schools are
generally deducted from the amount owed to us when payment is made. These
amounts are disclosed as "Direct site expenses - client paid" on our statements
of operations.

      We recognize per-pupil funding from local, state and federal sources,
including Title I and special education funding, which we define as "Gross
Student Funding." On a quarterly basis, we record adjustments to revenue, if
necessary, for enrollment fluctuations, changes to per-pupil funding estimates,
and changes to estimates for federal and state categorical grant funding.
Anticipated losses on contracts are charged to earnings when identified.

      In January 2002, the Emerging Issues Task Force ("EITF") issued EITF 01-14
"Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred." EITF 01-14 clarifies EITF 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent," which provides guidance on
whether revenues should be presented gross or net of certain costs. After
consultation with our independent auditors, we believe that EITF 01-14 should be
interpreted to


                                       15
<PAGE>
require us to present as revenue and expense only those direct site expenses
that we are primarily obligated to pay. In accordance with the transition
provisions of EITF 01-14, we adopted EITF 01-14 effective January 1, 2002 and
have reclassified all historical periods to conform with the new presentation
(see table below) and, in the interest of transparency, added a "gross student
funding" line to its statement of operations; gross student funding is not
revenue as defined by GAAP.

      In November 2001, the EITF issued EITF 01-09, "Accounting for
Consideration Given by a Vendor to a Customer." EITF 01-09 addresses the
appropriate income statement characterization of consideration given by a vendor
to a customer, specifically whether that consideration should be presented in
the vendor's income statements as a reduction of revenue or as an expense. We
determined that consideration given to two customers was, in effect, an
adjustment of our contract price and should be accounted for as a reduction in
revenue rather than as an expense subsequent to the promulgation of EITF 01-09.
In accordance with the transition provisions of EITF 01-09, we adopted EITF
01-09 effective January 1, 2002 and have reclassified all historical periods
(see table below) to conform with the new presentation.

      The reclassification effects of EITF 01-14, EITF 01-09 and other
immaterial reclassifications on our prior period financial statements is as
follows:


<TABLE>
<CAPTION>
                         THREE MONTHS NINE MONTHS
                            ENDED       ENDED
                          MARCH 31,   MARCH 31,       YEARS ENDED JUNE 30,
                          --------------------  -------------------------------
                            2002        2001       2001       2000      1999
                          ---------  ---------  ---------  ---------  ---------
<S>                       <C>        <C>        <C>        <C>        <C>
Revenue, as previously
   reported ............  $ 131,165  $ 266,690  $ 375,818  $ 224,578  $ 132,762
  Reclassifications ....     (9,261)   (18,038)   (25,310)   (15,606)    (7,677)
                          ---------  ---------  ---------  ---------  ---------
Net revenue ............  $ 121,904  $ 248,652  $ 350,508  $ 208,972  $ 125,085
                          =========  =========  =========  =========  =========
</TABLE>

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, which are often paid for by our clients on our
behalf, in which case they are disclosed as "direct site expense--client paid".
The remaining direct site expenses include on-site administration, facility
maintenance, utilities and, in some cases, student transportation. Once staffing
levels for the school year are determined, these expenses are relatively 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 net revenue less direct site
expenses. Gross site margin is gross site contribution expressed as a percentage
of net revenue. 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
margins vary considerably from school to school and sometimes year-to-year for
the same school. 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.


                                       16
<PAGE>
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 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 MARCH 31, 2002 COMPARED TO FISCAL QUARTER ENDED MARCH 31,
2001 (Restated)

      Net Revenue. Our net revenue increased to $121.9 million for the three
months ended March 31, 2002 from $92.8 million for the same period of the prior
year, an increase of 31.4%. The increase was primarily due to a 29.8% increase
in student enrollment from 57,000 in the 2000-2001 school year to 74,000 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 $100.2 million
for the three months ended March 31, 2002 from $74.7 million for the same period
of the prior year, an increase of 34.1%. Similar to the increase in net revenue,
the increase in direct site expenses was primarily due to the 29.8% increase in
student enrollment. The largest element of direct site expenses is personnel
costs. Personnel costs included in direct site expenses increased to $87.2
million for the three months ended March 31, 2002 from $63.6 million for the
same period of the prior year. Of the total direct site expense, $50.0 million
was client paid, up from $33.4 million in the same period of the prior year.
These client paid expenses consist entirely of personnel costs at our schools.

      Gross Site Contribution and Margin. Our gross site contribution was $21.7
million for the three month period ended March 31, 2002 compared to $18.1
million for the same period of the prior year. The corresponding gross site
margin decreased to 17.8% for the three months ended March 31, 2002 from 19.5%
for the same period of the prior year. The decrease in gross site margin was due
direct site costs growing more rapidly than net 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 $21.5 million for the three
months ended March 31, 2002 from $14.8 million for the same period of the prior
year, an increase of 45.3%. The increase was due, in part, to greater personnel
costs resulting from an increase of approximately 70 headquarters employees,
which reflects an increase in staff in our school operations, education,
administrative functions. The increase was also caused by approximately $3.7
million of costs related to the SEC inquiry and our sales and marketing
activities in Philadelphia.


                                       17
<PAGE>
      Pre-opening Expenses. Our pre-opening expenses decreased to $402,000 for
the three months ended March 31, 2002 from $639,000 for the same period of the
prior year. This quarter is typically when pre-opening expenses are lowest.

      Excluding non-cash stock-based compensation charges of $241,000,
administration, curriculum and development and pre-opening expenses as a
percentage of net revenues increased to 17.8% for three months ended March 31,
2002 from 16.2% for the prior year.

      Depreciation and Amortization. Our depreciation and amortization increased
to $9.8 million for the three months ended March 31, 2002 from $9.3 million for
the same period of the prior year, an increase of 5.4%.

      Education and Operating Expenses. Our total education and operating
expenses as a percentage of net revenue increased to 108.1% for three months
ended March 31, 2002 from 107.1% for the same period of the prior year. This
increase resulted primarily from an increase in direct site expenses as a
percentage of net revenue offset by a decrease in depreciation and amortization
expense as a percentage of net 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 March 31, 2002 was $103,000 compared to $3.1 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 net revenue. On a per-student basis,
EBITDA declined to $1 in three months ended March 31, 2002 compared to $54 for
the same period of the prior year.

      Other Income and Expense. Other expense, net was expense of $6.4 million
for the three months ended March 31, 2002 compared to income of $811,000 in the
same period of the prior year. The increased expense was due primarily to the
$6.8 million reduction in carrying value of our investment in Apex Learning,
Inc.

      Net Loss. Our net loss increased to $16.9 million for the three months
ended March 31, 2002 from $6.0 million for the same period of the prior year.

NINE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE NINE MONTHS ENDED MARCH 31,
2001

      Net Revenue. Our net revenue increased to $327.3 million for the nine
months ended March 31, 2002 from $248.7 million for the same period of the prior
year, an increase of 31.6%. The increase was primarily due to a 29.8% increase
in student enrollment from 57,000 in the 2000-2001 school year to 74,000 in the
2001-2002 school year, reflecting both the opening of new schools and the
expansion of existing schools. Additionally, we recognized $3.3 million and $2.7
million resulting from revenue recognized from our summer school program and a
consulting engagement, respectively.

      Direct Site Expenses. Our direct site expenses increased to $276.4 million
for the nine months ended March 31, 2002 from $210.4 million for the same period
of the prior year, an increase of 31.4%. Similar to the increase in net revenue,
the increase in direct site expenses was primarily due to the 29.8% increase in
student enrollment. The largest element of direct site expenses is personnel
costs. Personnel costs included in direct site expenses increased to $233.7
million for the nine months ended March 31, 2002 from $175.6 million for the
same period of the prior year. Of the total direct site expenses, $134.4 million
was client paid, up from $95.0 million in the same period of the prior year.
These client paid expenses consist entirely of personnel costs at our schools.

      Gross Site Contribution and Margin. Our gross site contribution was $50.8
million for the nine month period ended March 31, 2002 compared to $38.3 million
for the same period of the prior year. The corresponding gross site margin
increased to 15.5% for the nine months ended March 31, 2002 from 15.4% for the
same period of the prior year. 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
14.7% due to direct site costs growing more rapidly than net revenue, primarily
as a result of disappointing results for one of our new clients in fiscal 2002.


                                       18
<PAGE>
      Administration, Curriculum and Development Expenses. Our administration,
curriculum and development expenses increased to $54.0 million for the nine
months ended March 31, 2002 from $38.5 million for the same period of the prior
year, an increase of 40.3%. The increase was due, in part, to greater personnel
costs resulting from an increase of approximately 70 headquarters employees,
which reflects an increase in staff in our school operations, education,
administrative functions. The increase was also caused by approximately $6.2
million of costs related to the SEC inquiry and our sales and marketing
activities in Philadelphia. In addition, we incurred expenses relating to our
consulting engagement.

      Pre-opening Expenses. Our pre-opening expenses decreased to $5.6 million
for the nine months ended March 31, 2002 from $7.0 million for the same period
of the prior year, a decrease of 20.0%. This decrease was associated primarily
with opening new schools for the 2001-2002 school year, with approximately
17,000 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 $755,000,
administration, curriculum and development and pre-opening expenses as a
percentage of net revenue increased to 18.0% for nine months ended March 31,
2002 from 17.7% for the prior year.

      Depreciation and Amortization. Our depreciation and amortization increased
to $27.4 million for the nine months ended March 31, 2002 from $24.3 million for
the same period of the prior year, an increase of 12.8%. 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 net revenue decreased to 111.0% for nine months
ended March 31, 2002 from 112.6% for the same period of the prior year.

      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 nine
months ended March 31, 2002 was a negative $8.0 million compared to a negative
$5.8 million for the same period of the prior year. On a per-student basis,
negative EBITDA increased to $108 in nine months ended March 31, 2002 compared
to $101 for the same period of the prior year.

      Other Income and Expense. Other expense, net was expense of $6.3 million
for the nine months ended March 31, 2002 compared to income of $3.1 million in
the same period of the prior year. The increase in expense was due primarily to
the $6.8 million reduction in carrying value of our investment in Apex Learning,
Inc. and a charge of $2.6 million related to disposal of certain fixed assets.

      Net Loss. Our net loss increased to $43.3 million for nine months ended
March 31, 2002 from $29.3 million for the same period of the prior year, an
increase of 47.8%.

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 intend to enter into additional financing arrangements to fund future growth.
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 March 31, 2002.


                                       19
<PAGE>
      For the nine months ended March 31, 2002, we used approximately $13.0
million for operating activities. This use primarily resulted from $43.3 million
of net loss and a $6.8 million net increase in working capital accounts
partially offset by depreciation and amortization totaling $27.3 million, a
disposal of certain fixed assets totaling $2.6 million and a $6.8 million
reduction in the carrying value of our investment in Apex Learning Inc. (see
footnote No. 12 of the financial statements).

      For the nine months ended March 31, 2002, we used approximately $49.0
million in investing activities. During this period, we invested approximately
$16.5 million in our schools and central office. This amount includes the
investments we made in technology and curriculum in each of the schools we
opened or expanded. 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 nine months ended March 31, 2002 were approximately
$38.2 million. During this same period, we also received approximately $11.7
million in repayments on advances previously made. We made payments of
approximately $3.1 million in connection with the acquisitions of LearnNow and
K-Sixteen. Also, we invested approximately $2.8 million in other assets.

      For the nine months ended March 31, 2002, we received approximately $11.1
million for our financing activities. This increase resulted primarily from
borrowing $20.0 million on our credit facility, the release of approximately
$3.6 million of restricted cash and approximately $1.8 million of proceeds from
the issuance of stock and warrants, offset by the repayment of notes payable and
capital lease obligations of approximately $14.3 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. Our growth
and operations plans for the 2002-2003 school year will require us to obtain
additional funding by the summer of 2002. The amount of capital required will
depend upon our rate of growth and its mix of charter schools and contract
schools, as charter schools often require us to advance funds to help charter
boards obtain, renovate and complete school facilities.

      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.

      We expect to run summer school programs for approximately 50 districts in
the state of Missouri during June and July of 2002. We expect to spend
approximately $19 million, which includes teacher's salaries, curriculum and
other educational/promotional materials, over the two month period. Of the
amounts we will recognize as revenue for the 2002 summer program, payment terms
of the related billings range from twelve to eighteen months. Therefore, cash
receipts of revenue will lag outlay of cash for expenditures by more than one
year. Of the amounts we recognized as revenue for the summer of 2001, 42% of the
revenue have been collected as of May 14, 2002 with the remainder scheduled for
collection through January 2003.

      Capital expenditures for fiscal 2002 are currently expected to be
approximately $45.0 million, which includes approximately $25.0 million for
computers and other technology at our schools, approximately $5.0 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.


                                       20
<PAGE>
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.

OUR EMPLOYEES, INVESTORS, CLIENTS AND POTENTIAL CLIENTS MAY REACT ADVERSELY TO
THE ANNOUNCEMENT OF THE SEC ORDER AND THE REVISION OF OUR FINANCIAL RESULTS

      Our future success depends in large part on the support of our key
employees, the principals and teachers at our schools, investors, and school
district and charter board clients and potential clients, who may react
negatively to the announcement of the SEC order, which was issued on May 14,
2002, and the revision of our financial results. We expect to receive
substantial amounts of adverse publicity following the announcement, which may
seriously and irreparably injure our reputation. Investors may lose confidence
in Edison and our management, which may cause the trading price of our class A
common stock to decline. The announcement of the SEC order and the revision of
our financial results could have a number of additional material and adverse
effects on our business, including the following:

      -     We may be unable to consummate the possible financing transaction
            discussed on May 14, 2002, and we may be unable to otherwise obtain
            sufficient financing to continue operations or expand our business.

      -     We may find it more difficult to enter into additional management
            agreements or renew existing management agreements, and some of our
            current school district or charter board clients may attempt to
            terminate existing management agreements.

      -     We may face increased resistance from teacher's unions at the local
            and national level.

      -     Our class A common stock may be delisted from the Nasdaq National
            Market as a result of continued declines in its trading price or
            other factors.

WE MAY FACE LITIGATION AS A RESULT OF THE ANNOUNCEMENT OF THE SEC ORDER AND THE
REVISION OF OUR FINANCIAL RESULTS THAT COULD SERIOUSLY HARM OUR BUSINESS

      Our shareholders may file lawsuits against us, our directors and our
executive officers as a result of the SEC order and the revision of our
financial results. On May 15, 2002, at least three law firms announced the
filing of class action lawsuits against Edison on behalf of investors who
purchased Edison securities from November 11, 1999 through February 13, 2002.
Lawsuits may cause defaults under our material agreements, prevent us from
obtaining additional funds under our existing line of credit or obtain
additional financing.


                                       21
<PAGE>
The defense of any claim could entail substantial expense and divert the time
and attention of key management personnel. The amount we may be required to pay
in connection with the resolution of any such lawsuit, by settlement or
otherwise, could seriously harm our financial condition.

WE MAY BE REQUIRED TO RESTATE, RECLASSIFY OR REVISE PORTIONS OF OUR HISTORICAL
FINANCIAL STATEMENTS RELATED TO THE SEC ORDER FOLLOWING FURTHER REVIEW

      We will restate and reclassify portions of our historical financial
statements in accordance with the SEC order. Our independent auditors and the
SEC will review the restatements and reclassifications and our historical
accounting practices and results as they relate to the restatements and
reclassifications. In connection with this review, Edison, our independent
auditors or the SEC may identify additional items that materially and adversely
affect our financial results for the current or additional historical quarterly
and annual reporting periods and require additional restatements or
reclassifications of or changes to our current or historical financial
statements.

WE WILL NOT BE ABLE TO EXPAND EXISTING SCHOOLS OR OPEN NEW SCHOOLS FOR THE
2002-2003 SCHOOL YEAR UNLESS WE OBTAIN ADDITIONAL FINANCING

      We must obtain additional funding by the summer of 2002 to expand existing
schools and open new schools for the 2002-2003 school year. Obtaining additional
financing will be subject to a number of factors, including market conditions,
our operating performance and investor sentiment. We cannot be certain that we
will be able to obtain the necessary financing on favorable terms, if at all. We
may be unable consummate the possible financing transaction discussed on May 14,
2002. Our failure to open new schools for the 2002-2003 school year could damage
our reputation, disappoint investors' expectations and adversely affect the
market price of our class A common stock. This could also seriously compromise
our ability to pursue our growth and operating strategy.

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 March 31, 2002, our net loss was $16.9
million. As of March 31, 2002, our accumulated deficit since November 1996, when
we converted from a partnership to a corporation, was approximately $199.4
million. In addition, prior to November 1996, we incurred losses of
approximately $61.8 million, which are reflected in our additional paid-in
capital. We have not yet demonstrated that public schools can be profitably
managed by private companies and we are not certain when we will become
profitable, if at all. Our ability to become profitable will depend upon our
ability to generate and sustain higher levels of both gross site contribution
and total revenue to allow us to reduce central expenses as a percentage of
total revenue. Even if we do achieve profitability, we may not sustain or
increase profitability on a quarterly or annual basis. Failure to become and
remain profitable may adversely affect the market price of our class A common
stock and our ability to raise capital and continue operations.

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

      Our future is highly dependent upon the development, acceptance and
expansion of the market for private, for-profit management of public schools.
This market has only recently developed, and we are among the first companies to
provide these services on a for-profit basis. We believe the first meaningful
example of a school district contracting with a private company to provide core
instructional services was in 1992, and we opened our first schools in August
1995. The development of this market


                                       22
<PAGE>
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 for which we are providing consulting services,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 as a consultant, 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 earn under our management agreement 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
133 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.

      As part of the SEC order, we have agreed to improve our system of internal
accounting controls, and report to the SEC on our progress in this regard. We
could be subject to sanction by the SEC if it determines that we have failed to
sufficiently improve our system of internal accounting controls.

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


                                       23
<PAGE>
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 the agreement we are pursuing in 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 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


                                       24
<PAGE>
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 results 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. Seven management agreements representing 15 schools, accounting for 13.7%
of our net revenue for fiscal 2001, will expire at the end of the 2001-2002
school year. Renewals of four of these agreements are being negotiated, one has
terminated early, and we do not expect to renew the remaining two. Eleven
management agreements representing 26 schools, accounting for 19.4% of our net
revenue for fiscal 2001, will expire at the end of the 2002-2003 school year. In
addition, management agreements representing 17 schools, accounting for 13.9% of
our net 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.

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


                                       25
<PAGE>
pupil on high school education than on elementary education. By contrast, some
of our management agreements provide that we earn for each student, regardless
of grade level, gross student funding equivalent to the average per-pupil
funding spent by the school district for all grade levels. For this reason, in
these schools we earn 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. Although we
have been selected to provide consulting services to the Philadelphia school
district, and have been selected to provide management services to certain
schools, no contracts have been awarded and we do not know with any certainty
when and if such contracts will be finalized. 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, we will not 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.

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

      As of March 31, 2002, we have outstanding loans or advances to charter
boards of $88.2 million to finance the purchase or renovation of school
facilities we manage. Approximately $19.5 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


                                       26
<PAGE>
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 $9.5 million to one client where our relationship terminated
during 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
March 31, 2002, our aggregate future lease obligations totaled $50.4 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 March 31, 2002 the amount of loans we had
guaranteed totaled $21.8 million and the cash collateral provided totaled
$500,000 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
            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


                                       27
<PAGE>
            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 ARE NOT PAID FOR OPERATING SUMMER SCHOOLS UNTIL 12 TO 18 MONTHS AFTER THE
COMPLETION OF THE SUMMER SCHOOL PROGRAMS, WHICH COULD HAVE AN ADVERSE EFFECT ON
OUR CASH RESOURCES

      We expect to spend approximately $19 million in the fourth quarter of
fiscal 2002 and the first quarter of fiscal 2003 to operate our 2002 summer
school programs. Our school district clients are not obligated to pay us until
12 to 18 months after the completion of the summer school programs. This will
reduce our cash resources and could affect our ability to operate existing
schools and open new schools in the 2002-2003 school year. Our school district
clients pay us for operating summer schools using funds from state education
programs. The funds to be provided by the state education programs to pay us for
operating summer schools are not appropriated by state legislatures until
immediately prior to the beginning of our summer school program, at which point
we have already hired staff for the summer school programs and incurred
additional expenses. Consequently, if the state legislatures were to reduce the
appropriation levels, we may be unable to adjust spending quickly enough to
offset the shortfall in revenues and we may not be able to recover the funds
already expended.


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 year, 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.

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


                                       28
<PAGE>
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 gross student funding 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 gross student funding. 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 earn 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 earn 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.

      -     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


                                       29
<PAGE>
            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
earned 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 EARN ALL OF OUR REVENUE FROM PUBLIC SOURCES AND ANY REDUCTION IN GENERAL
FUNDING LEVELS FOR EDUCATION COULD HURT OUR BUSINESS

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

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

      Any restriction on the use of federal or state government educational
funds by for-profit companies could hurt our business and our ability to grow.
From time to time, a variety of proposals have been introduced in state
legislatures to restrict or prohibit the management of public schools by
private, for-profit entities like us. If states or the federal government were
to adopt legislation prohibiting for-profit entities from operating public
schools, the market for our services would decline and our business results
could suffer.

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

      Our charter schools operate under a charter that is typically granted by a
state authority to a third-party charter holder, such as a community group or
established non-profit organization. Our management agreement in turn is with
the charter holder. If the state charter authority were to revoke the charter,
which could occur based on actions of the charter holder outside of our control,
we would lose the right to operate that school. In addition, many state charter
school statutes require periodic reauthorization. Charter schools accounted for
36.8% and 35.6% of our net revenue in fiscal 2001 and the nine months ended
March 31, 2002, respectively. If state charter school legislation were not
reauthorized or were


                                       30
<PAGE>
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 was placed on probation for a period of
90 days by the state charter authority. This probationary period expired in
March 2002; however, prior to its expiration, the probationary period was
extended to June 30, 2002. The Company no longer has a relationship with this
charter board and therefore is no longer recording revenue associated with this
charter school.

      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 March 31, 2002, our officers and directors
and entities affiliated with them together beneficially own 10,413,426 shares of
class A common stock and 1,866,878 shares of class B common stock. These shares
represent approximately 20.4% of the voting power of the class A common stock,
including the ability to elect one of the seven class A directors; approximately
77.2% of the voting power of the class B common stock, including the ability to
elect three of the four class B directors; and approximately 35.3% 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, 6,294,541 shares of class A common stock and 612,936 shares of class B
common stock are subject to options exercisable within 60 days of March 31,
2002. 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 March 31, 2002, H. Christopher
Whittle, our President and Chief Executive Officer and a director, beneficially
owns 6,787,697 shares of class A common stock and 1,519,206 shares of class B
common stock. These shares represent approximately 14.2% of the voting power of
the class A common stock; including the ability to elect one of the seven class
A directors; approximately 66.4% of the voting power of the class B common
stock, including the ability to elect three of the four class B directors; and
approximately 27.6% of the combined voting power of the class A and class B
common stock. Of the shares beneficially owned by Mr. Whittle and his
affiliates, 4,926,079 shares of class A common stock and 482,529 shares of class
B common stock are subject to options exercisable within 60 days of March 31,
2002. Mr. Whittle and his affiliates also own options not exercisable within 60
days of March 31, 2002 covering 1,316,737 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 March 31, 2002, Mr. Whittle and WSI Inc.,
a corporation controlled by Mr. Whittle, directly or indirectly own 5,749,321
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 include shares issuable upon the exercise of options within 60 days of
March 31, 2002. Mr. Whittle and WSI have pledged to


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<PAGE>
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 March 31, 2002, 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 7,249,595 shares of class A common stock, including shares
subject to options exercisable within 60 days of March 31, 2002. The holdings of
Morgan and its affiliates would then represent 12.4% of the voting power of the
class A common stock and 11.6% 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 and growth prospects;

      -     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. From November 11, 1999 (the first day of public trading of our class A
common stock), through May 14, 2002, the high and low sales prices for our class
A common stock fluctuated between $38.75 and $1.72. On May 14, 2002, the
closing price of our class A common stock was $2.94. 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;


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

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

      -     a prohibition of stockholder action by written consent; and

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

ITEM 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 $13.7 million at March 31,
2002. 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 $45.3 million at March 31, 2002.
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

      As of May 15, 2002, at least three law firms had announced the filing in
the United States District Court for the Southern District of New York of class
action lawsuits against the Company and several of its officers on behalf of
investors who purchased the Company's securities from November 11, 1999 through
May 14, 2002. The lawsuits purportedly allege securities law violations under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder relating to the Company's financial reporting. The complaints in
these lawsuits have not yet been served on the Company and the Company has not
yet had a chance to substantively review the complaints. The Company intends to
vigorously defend these lawsuits. However, there can be no assurance that the
Company will be successful, and an adverse resolution of the lawsuits could
have a material adverse effect on the Company's financial position and results
of operations in the period in which the lawsuits are resolved. The Company is
not presently able to reasonably estimate potential losses, if any, related to
the lawsuits. Such litigation could also substantially divert the attention of
the Company's management and its resources in general. Uncertainties resulting
from the initiation and continuation of any litigation or other proceedings
could harm the Company's ability to compete in its marketplace.

      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

      None

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

Exhibits:

      None


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<PAGE>
Reports on Form 8-K:

      On May 15, 2002, the Company filed a Current Report on Form 8-K
announcing that on May 14, 2002, the Company (i) issued a press release
reporting its financing results for the three months ended March 31, 2002 and
(ii) issued a press release announcing that the Company concluded and resolved
a confidential informal inquiry of its accounting practices and policies by the
Securities and Exchange Commission.


<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 May 16, 2002            /s/ H. Christopher Whittle
                             ---------------------------------------------------
                                 H. Christopher Whittle
                                 President, Chief Executive Officer and Director


Date May 16, 2002            /s/ Adam Feild
                             ---------------------------------------------------
                                 Adam Feild
                                 Executive Vice President and Chief
                                 Financial Officer
                                 (Principal Accounting Officer)


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