This report analyzes options for modifying the current provisions for allocating Chapter 1 funds to better meet the program's goals. The report is organized in seven sections. Following an executive summary and introductory remarks in section 1, section 2 analyzes the existing Chapter 1 funds allocation formulas. Section 3 analyzes the targeting of the Chapter 1 program, including the consequences of current formula provisions on the distribution of funds among schools, school districts, and counties; and the potential effects of selected formula alternatives designed to improve targeting. Section 4 analyzes demographic shifts in poverty among school-age children and youth from one decennial census to another and the resulting impact on the distribution of Chapter 1 funds among counties and states. Section 5 discusses the rationale for adjusting Chapter 1 allocations for interstate differences in costs, the redistributive effects of the current cost adjustment, the accuracy of the current per-pupil expenditure factor as a proxy for the cost of education, and the effects of substituting alternative cost proxies on the distribution of Chapter 1 funds among states and counties. Section 6 discusses the rationale for adjusting Chapter 1 allocations for interstate differences in fiscal capacity and fiscal effort, and examines the redistributive effects of doing so. Section 7 addresses Chapter 1 comparability requirements. Sixty-one exhibits illustrate the discussion. Three appendixes present tables of Chapter 1 funding and allocation data about 10 counties with the highest concentrations of poor children, the 10 largest school districts, and number threshold versus percentage threshold statistics. (Contains 36 references.) (GLR)