Feeling responsible for Izzie's death, Jack fights with Tom, abuses antidepressants and overcompensates by initiating an ambitious "come one, come all" policy at Waterloo Road, worrying Davina. Stretching the school's budget and using questionable ethics, Jack imports top students while excluding local but underperforming kids. And to bolster his inclusionary tactics, he accepts a troubled girl, Karla Bentham, who has Asberger's syndrome. Jack's new deputy, Eddie Lawson, is dubious of the plan and eventually shows his disloyalty.
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Steph is overwhelmed by her duties as head of pastoral care and reluctant to carry them out. She dismisses fellow teacher Joanna's concerns about Paul Langley, who Joanna thinks is being abused at home. Paul's bruises might be caused by a "fight club" in which he lets out his aggression. When Eddie finds out about the situation, however, he hides in Paul's house and catches Paul's uncle beating him.
Thanks to Jack's unorthodox use of school funds, Waterloo Road's first-ever girls' soccer team, coached by Tom, has no uniforms. Two popular girls raise money by hosting a fraudulent raffle. But when a teacher, Jasmine, can't stand the pre-match high spirits, she throws half of the team into detention, jeopardizing their match.
During preparations for the musical, student Ben McNulty and his drama teacher, Matt Wilding, are slightly injured by a falling set. Everyone is bewildered by Ben's extreme reaction and by the usually apathetic Steph's swift response. Steph eventually reveals that Ben is HIV positive.
Steph urges Jack to tell his fiance, Davina, about their tryst. He desperately wants to be honest with Davina, but he can't risk losing her. Unfortunately for Jack, a misunderstanding in the staff room leads to Davina finding out for herself.
Davina defends Jack against rumors that he misspent school funds, but she can't forgive him for sleeping with Steph. Eddie learns that Jack offered single mothers money to send their gifted children to Waterloo Road, and the ensuing confrontation spills into the hallways with everyone overhearing.
With Jack having departed Waterloo Road, Eddie believes he is destined to become the acting head, but new arrival Rachel Mason takes the position, immediately clashing with Eddie. She institutes a plan to turn the school into a business enterprise college, canceling classes so the students can work on their entrepreneurial skills. When Eddie sees how enthused the kids are, even Brett, he begins to believe in Rachel's methods.
When Eddie takes the most troublesome boys on a camping trip to teach them responsibility, bully Bolton Smilie almost falls off a cliff. Eddie injures his neck rescuing him and later dejectedly admits his disappointment to Rachel as they begin to bond over coping with Bolton.
During an archaeological dig in the school's playing fields, Karla and classmate Janeece uncover the skeleton of a baby. A student named Maxine admits to the police that she gave birth to a stillborn when she was homeless and drug-addicted.
As Rachel and Eddie present their new initiative for Waterloo Road, the Rochdale Business and Enterprise College, Eddie's ex-wife, Alison, arrives to dump Eddie's son, Michael, on him. Without Eddie, Rachel fails to impress the Department for Education and Science, so she tries to salvage the situation by moving the school musical up a day to show the department how talented the kids are.
With Bolton and his gang 18 months away from getting out of school, Rachel takes them to visit a prison to teach them to take their futures seriously. Bolton acts tough in front of his friends and even scores some drugs while there. But when an inmate attacks Matt, and the prison guards discover the drugs and throw Bolton into a cell with a hardened inmate, the terrified teen cries and begs to be released.
A developer, Stuart Hordley, threatens to blackmail Rachel into reinstating his rejected bid to build Waterloo Road's new training center by revealing that she changed her name in an attempt to hide something in her past. To Rachel's chagrin, Stuart ingratiates himself with Eddie and the students, enticing the kids with a junior office position at his company for the best-performing pupil.
Rachel must support the construction bid of blackmailer Stuart in order to keep her past a secret. But the head councilor is ready to give the job to another company - until Rachel overhears him taking bribes. She persuades the council to hire Stuart.
When teacher Jasmine witnesses a student, Michaela White, bullying classmate Shane Warwick, she roughly separates them - but scheming Michaela accuses Jasmine of assaulting her, even faking injuries and forcing Shane to corroborate her story.
Drama teacher Matt hastily hides all traces of his boyfriend, Colin, before the arrival of Matt's mother. During a school trip to Colin's office with the school's budding entrepreneurs, Matt tries to explain that he doesn't want his mother to know he's gay, but Colin angrily breaks up with him.
When Jasmine is reinstated, popular substitute teacher Wilson Bingham must go, to the disappointment of everyone, especially student Janeece, who has a huge crush on him. Shockingly, Wilson reciprocates her feelings, booking a hotel room for them and showering her with expensive gifts.
Newly minted eco-terrorists Mika and Brett halt the new building's construction to protect the site's trees. With Eddie already threatening to resign because of Rachel's unethical support of Stuart's construction bid, Rachel must contain the protest while coping with a bounced check from Stuart.
At dawn, terrified student Sameen breaks into the school's changing rooms wearing only her pajamas and quickly changes into a soccer uniform. Later, after Sameen becomes hysterical when questioned, Tom and Rachel find out that the immigration authorities are holding Sameen's parents and searching for her in order to deport them all.
Former headmaster Jack Rimmer surprises everyone by returning and asking Davina, who is still attracted to him, to accompany him to Dubai, where he has gotten a job. Chlo and Mika conspire to have Tom show up at a restaurant where Jack and Davina are dining.
On the last day of school, Rachel is relieved that she has finally gotten rid of Stuart. During Rachel's speech celebrating Waterloo Road's victory in a spelling bee, Stuart shouts her down and reveals in front of everyone that Rachel was once a prostitute.