This report contains the findings of the first year of a 2-year Hudson Institute study of U.S. charter schools, which focused on their startup problems, solutions to the problems, and the policy environments in which such schools are most likely to thrive or falter. Data during 1995-96 were derived from site visits to 35 charter schools, which comprise a cross-section of the approximately 225 charter schools operating at that time. Approximately 600 interviews were conducted with local business and educational leaders and with 107 state-level policymakers, educators, and interest-group leaders. Some highlights of the findings include the following: Of the nearly 8,400 students in the sample, 63 percent were minority-group members. Eighty-one percent had been enrolled in public schools immediately before coming to the charter schools. Charter schools include schools for at-risk youngsters and special populations, distance learning, teacher cooperatives, and contract-managed schools. Major startup problems included the large numbers of disadvantaged and at-risk students, lack of capital and startup funds, burdensome paperwork, regulatory restrictions, and governance difficulties. Charter schools are most likely to arise in states with stronger charter-school laws, which feature sponsorship options for other than school boards, openness to diverse charter applicants, automatic exemption from laws and regulations, and true fiscal and legal autonomy for charter schools. The report also reviews policy issues that face charter schools, including special education, teacher unions, finance, accountability and evaluation, prevention of school failure, and federal policy. The report concludes that: (1) The demand for charter schools currently exceeds the supply; (2) there is growing evidence that supports charter schools' educational effectiveness; (3) charter schools' attractive features include their smaller size, focused missions, freedom from excessive regulation and control, and choices offered to students and teachers; and (4) charter schools foster innovation and promote accountability. Policy recommendations are included. Appendices contain characteristics of state charter-school laws, state case studies, a list of participating schools, and a list of interview participants. (Contains 5 tables and 13 references.) (LMI)