New York State annually provides about $135 million of magnet school grants for 19 of its 700 school districts. The state's education department audited the 19 school districts receiving grants to determine whether implementation of grants had been adequately monitored and whether goals had been attained for such funding for the period July 1, 1997 through March 31, 2000. Observations and conclusions were that the department's monitoring of magnet grants had not been sufficient. The department failed to identify performance objectives and measurement approaches for magnet goals, properly document its review of magnet grant applications, or conduct school district field visits focusing on the proper administration of magnet grants. As a result, the department had not adequately assessed the effectiveness of school districts' implementation of magnet goals. The audit found that some magnet schools reduced racial isolation dramatically, but others remained about the same or worsened. Magnet expenditures and practices were found to be inconsistent with the department guidelines in six selected school districts. Recommendations include that the department improve magnet-school monitoring, strengthen understanding of the law governing grant use, provide necessary guidance to districts about grant administration, and consider whether new and different initiatives are needed to address the persistence of racial isolation in public schools. Appended are Major Contributors to the Report and Comments of Department Officials. (RT)