This paper examines policy options in implementing least restrictive environment (LRE) requirements of federal legislation (Public Laws 99-457 and 94-142), and offers recommendations regarding the array of placement options that should be available in relation to preschool children with handicaps. First, the legal interpretation of LRE is analyzed and distinctions drawn among the concepts of LRE, mainstreaming, and physical or social integration. The ethical, legal, and empirical bases for individualized implementation of LRE at the preschool level are emphasized. In considering the design of integrated preschools, recent critiques appear to reflect consensus around four essential points: (1) conceptualizing LRE along a continuum of most to least restrictive is problematic; (2) integrated teaching and learning must occur throughout the curriculum and school day; (3) the segregation of preschool age students with disabilities should be viewed as maximally restrictive and avoided whenever possible; and (4) the intensity of individualized services is the key to successful integration. Eight characteristics of successful integrated programs are identified, including planned social interactions between handicapped and normally developing peers and an individualized curriculum. Four placement options are recommended: mainstreamed educational programs; mainstreamed noneducational programs; integrated special education or reverse mainstreaming; and nonintegrated special education programs located in regular elementary schools. Finally, implications for policy makers, administrators, and professionals are drawn. Appendixes list suggested resources. Includes 17 references. (DB)