One of the most significant prerequisites for an innovative school is the presence of transformational leaders and knowledge sharing. The primary purpose of this study was to determine the effect of the transformational leadership on organizational innovation with the mediating role of knowledge management. It applied research by orientation, descriptive research by purpose, survey research by strategy, causal research by nature, and a questionnaire in terms of data collection methods. Data were collected from 265 school principals, expert officers and deputy managers at the Department of Education of Dasht-e Azadegan county, Khuzestan province, Iran. As the target population was small, census sampling was adopted and all the 265 members participated in the survey. For data collection, the Multifactor Leadership, Organizational Innovation, and Knowledge Management Questionnaires were used, whose reliability (using Cronbach’s alpha) was estimated to be 0.89, 0.93, and 0.91, respectively. Factor analysis was used for validity assessment. For data analysis, structural equation modeling in Amos software was employed. The results showed that components of intellectual stimulation, idealized influence, inspirational motivation, and individualized consideration, both directly and through the mediating role of knowledge management, influence organizational innovation of schools.