This document is the First Annual Report to the Congress on state and local uses of those federal education funds for which the states have discretionary administrative authority. The first chapter presents the specific reporting requirements to be met under the law, the scope of the reporting effort, and a discussion of the strategies and activities to be followed by the U.S. Office of Education and the states in meeting the mandate. Chapter 2 discusses the flow of state-administered federal grant funds, significant factors related to federal education funding, and factors related to state uses of federal funds. Chapter 3 describes the characteristics of the state records for federal grant administration, including the data items sought in the collection effort, factors pertinent to the state data and record-keeping systems, and limitations in interpretation of the data. Chapter 4 presents a glossary that provides definitions of terms and abbreviations used in this text. Finally, an appendix is included that describes the data collection, including the rationale for the data items, data collection guidelines, and the various tasks performed in the collection and processing of the data. (Author)