The report analyzes ways in which the states are currently using P.L. 94-142 (The Education for All Handicapped Children Act) set-aside funds and considers possible effects of a shift in the set-aside proportion. States are allowed to set aside up to 25% of their federal grants for their own allocation. The report focuses on data from three sources: a national telephone survey of state offices of special education in 48 states; interviews with federal and state officials, local educators, and special interest groups; and site visits to three states. Findings revealed the types of activities currently being funded, average percentage set aside, functions of the set aside, and effects of shifting the proportion. It was concluded that the states' use of the set-aside is consistent with federal legislation and meets their needs. Suggestions for giving the states more flexibility in decisionmaking were noted, and the necessity for gathering national data on the set-aside program was emphasized. Responses of officials of the Department of Education to this report are summarized. (CL)