This report summarizes activities of the 5-year Rural Education Project of the Mid-continent Regional Educational Laboratory (McREL) and reviews the current state of rural education. Deteriorating agricultural economy and mandated school reforms were found to have exacerbated rural school problems of maintaining quality programs in situations of declining enrollment and rising costs. The Rural Education Project sought to identify unique characteristics of small rural schools and to develop the capacity of the rural education community to address issues of rural education cooperatively. The Project established clusters of rural schools linked with institutions of higher education and state education agencies to improve local schools and to create a network of agencies involved in rural educational development. Clusters provided staff and curriculum development, cooperative planning for resource sharing, instructional uses of microcomputers, and rural school involvement in economic development; in addition, participants discussed regional issues, and participated in research studies to provide information about rural education. The Project implemented and evaluated criteria for effective schools as outlined by another McREL project. The report lists useful elements of rural school improvement programs, guidelines for establishing clusters, examples of cluster activities, and nine characteristics of effective schools with corresponding results observed in two rural schools. (LFL)