A number of Federal education reform initiatives, either enacted or under consideration by the Congress, provide schools with regulatory flexibility. In response to two Congressional committees, this study had the following objectives: (1) describe state regulatory flexibility efforts; (2) describe how schools used flexibility to attempt improvement; (3) determine what accountability systems states have implemented to ensure that children benefit from these efforts; and (4) determine how these efforts affected children with special needs. Because of the similarities of three states' (California, Kentucky, and South Carolina) programs for children with special needs to many federal programs, the research focuses on these states' efforts to provide flexibility to schools and provide lessons for federal programs. In each of the three states local, district, and state school officials were interviewed and information collected about the effects of federal regulations and monitoring on their efforts. Recommendations are made for Congressional consideration and for the Secretary of Education. Comments from the Department of Education and state officials are summarized. The appendices, which comprise over half of the document, provide profiles of each of the three states' experiences with the objectives of the study. (MLF)