One of the most pressing problems in California is improving student academic performance, especially the state's burgeoning Latino student population. This study examined the extent of the achievement gap between Latino and White students over the first two years of elementary school and the characteristics of students and schools that contribute to it. The analysis revealed that Latino students begin kindergarten at a considerable educational disadvantage relative to White students and the disadvantage increases during the first two years of school. Yet schools do little to widen or narrow these differences. Instead achievement differences increase when students are not in school. Consequently, to reduce the achievement gap will require both effective education policies and policies that address the overall social welfare of Latinos outside of school. (Contains 1 table, 3 figures and 20 footnotes.) [The report was supported through a grant from the UC Latino Policy Institute.]