This report focuses on state drug policies and their budgetary consequences. Included are the observations of the Governors Leadership Council, composed of former governors from both parties, convened to help guide state governments in dealing with substance abuse. The report examines the growth rate of the drug offender population in state prisons over the last 20 years. Despite a huge increase in the drug prison population since 1980, drugs are cheaper, purer, and more available than ever before. Tougher sentencing, which had been regarded as a solution to the drug problem, has failed to keep drugs off the streets. Tougher prison sentences have imposed long-term burdens on state budgets. As state spending on prisons continues to increase, many governors and state legislators are exploring ways to diminish the reliance on incarceration as the first response to drug abuse. A number of promising statewide programs involving treatment and prevention programs are included in this report. Programs include Connecticut's Alternative to Incarceration Program; New Jersey's Approach to Welfare and Substance Abuse; Illinois' Child Welfare and Substance Abuse Program; and Delaware's Comprehensive Drug Treatment Program for Prisoners. (Contains 9 figures and 75 references.) (JDM)