The HEW report to Congress discusses the Public Law 89-313 program to provide federal assistance for the education of handicapped children in state-operated and supported schools, focusing on the issue of federal versus state responsibility. The need to clarify the program's direction is examined, and it is recommended that Congress specify whether funding is supplementary to a basic, state-financed educational activity or whether it should help finance the basic educational program itself. The need for clarification regarding the targeting of funds is also examined and stressed. Observations on the program's administration are presented, including its legislative placement, guidance and oversight functions, and the dissemination of program results. It is recommended that Congress transfer the 89-313 program from Title I of the Elementary and Secondary Education Act of 1965 to the Education of the Handicapped Act. Included in the five appendixes are tables of the targeting of funds to children, both by state agencies and by schools. (DLS)