Chapter One of the Education Consolidation and Improvement Act (ECIA) distributes compensatory education grants on the basis of a formula that considers population and cost factors for each of the nation's 3,128 counties. The focus of this report is the effectiveness of that formula in meeting the stated purpose of the legislation to provide aid for educationally disadvantaged children, defined as those who are economically deprived. The study, using a specially constructed computer model of the funding formula, projects allocations for all counties through 1987 and examines the distributional effects of proposed formula modifications. Among the findings are an inverse relationship between proportionate concentrations of economically disadvantaged youngsters and allocations per eligible child. The formula calculates the entitlement for each county by multiplying the number of eligible children by an education cost factor specific to the state in which the county is located. Most states with low per pupil expenditure also have low per capita income--an indicator of limited government fiscal capacity. To address the gap between the expressed intent and the implementation of the legislation, three alternative modifications are suggested. Tables and figures accompany the text. (MLF)