This report was produced in response to Rider 49 of the 2001 General Appropriations Act, which directed the Texas Higher Education Coordinating Board to study the effects of the funding formula on institutions of higher education with fewer than 10,000 students and determine the adequacy of the funding formula for these institutions in comparison with larger institutions. Formula funding accounts for 68% of state funding to all four-year General Academic institutions in fiscal year 2002. Additional state funding comes to the institutions from supplemental payments occurring outside of the formula. Studies of the adequacy of the formula for one size of institution versus another ignores a substantial portion of the funding received by all institutions, regardless of size. Without consideration of nonformula payments, the analysis does not show a discernable pattern indicating that the formula inadequately reimburses institutions with fewer than 10,000 students. However, a small school supplement is paid to institutions with fewer than 5,000 students, and there may be reason to believe that a similar supplement should be made available to the institutions with enrollments between 5,000 and 10,000 students. As an alternative, the Lieutenant Governor of Texas has suggested a greater proportion of the total funding could come directly from the formulas, eliminating much of the special, supplemental funding that currently exists. This could also eliminate or reduce the disparity between funding for larger versus smaller higher education institutions. Four appendixes discuss specifics of the formula funding and institutional enhancements. (SLD)