From: %windir%\Help\ntcmds.chm
Edit
Starts MS-DOS Editor, which creates and changes ASCII text files. Used without parameters, edit starts MS-DOS Editor.
Syntax
edit [[Drive:][Path] FileName] [/b] [/g] [/h] [/nohi]
Parameters
[Drive:][Path] FileName
Specifies the location and name of an ASCII text file. If the file does not exist, MS-DOS Editor creates it. If the file exists, MS-DOS Editor opens it and displays its contents on the screen.
/b
Displays MS-DOS Editor in black and white. Use this command-line option if a monochrome monitor does not display MS-DOS Editor correctly.
/g
Uses the fastest screen updating possible for a CGA monitor.
/h
Displays the maximum number of lines possible for the current monitor.
/nohi
Enables you to use eight-color monitors with MS-DOS Editor. Typically, Windows XP uses 16 colors.
/?
Displays help at the command prompt.
Remarks:
Windows XP does not use this command. It is accepted only for compatibility with MS-DOS files.
Depending on your PATH statement, and the OEM build you will either get nothing, a launch of WordPad or edlin, or the edlin replacement.
As I mentioned earlier above there is no consistency in an OEM build as to what is included for these optional elements of XP. I would most certainly check your environmental PATH statements to be sure, if available, edit.com can be found. (It should be in %windir%\system32
The last thing to check is if there is not a corrupted version of the file. Start, Run, CMD
c:
cd \%windir%\system32
edit
Does it work now? If not, use MSCONFIG or Recovery Console to replace your disk image.