In an effort to alleviate the perceived growth of a digital divide, the U.S. government enacted a major subsidy for Internet and communications investment in schools starting in 1998. In this paper, we evaluate the effect of the subsidy—known as the E-Rate—on Internet investment in California public schools. The program subsidized spending by 20-90 percent, depending on school characteristics. Using new data on school technology usage in every school in California from 1996 to 2000 as well as application data from the E-Rate program, the results indicate that the subsidy did succeed in significantly increasing Internet investment is between -0.4 and -1.1 and the greatest sensitivity is seen among urban schools and schools with large black and H s panic student populations. Rural and predominantly white and Asian schools show much less sensitivity. Overall , by the final year of the sampel , there were about 68 percent more Internet-connected classrooms per teacher than there would have been without the subsidy. Using a variety of test score results ,however, we do not find significant effects of the E-Rate program ,at least so far, on student performance.