A 5-year qualitative study of implementation of the Kentucky Education Reform Act (KERA) analyzes the effects on four rural school districts of large-scale changes in state policy. This annual report of the project focuses on five key KERA "strands." First, KERA mandates that grades K-3 be replaced with an ungraded primary program characterized by seven "critical attributes." Developmentally appropriate practices was the most successfully implemented attribute, but dual-age grouping (the preferred multiage pattern of most schools) appeared to be acting as a barrier to continuous progress, a third attribute. With regard to the second strand--instruction, assessment, and accountability--major findings were that the state assessment program was the driving force behind most instructional changes, emphasis on writing had been increased, teachers had mixed reactions to this increased emphasis, and there was little school-wide planning and implementation of instructional changes. The third strand--extended school services (ESS)--involves instruction or tutoring provided at times other than during the regular school day. Reports about the effectiveness of ESS were mixed, possibly because of a wide range in class size and lack of integration with regular classroom programs. Fourth, although school-based decision making as mandated by KERA gives school councils significant authority, the power structure and decision-making processes of particular councils varied considerably and were related to cultural factors unique to each district. Fifth, only the neediest district had applied for and received grants for family resource and youth services centers, sites of integrated services for high-risk youth and families. This report also includes an overview of the KERA funding formula and other state educational funding, research questions for the 5-year project, and Kentucky's academic expectations. Contains 52 references. (SV)