This study analyzes the overall state role in implementing federal and state education programs. It focuses on state management of the two largest federal education programs: the Elementary and Secondary Education Act Title I — now Chapter 1 of the Education Consolidation and Improvement Act of 1981 (ECIA) — which provides compensatory education services; and the Education for All Handicapped Children Act, which serves special education students. The study also examines state-funded compensatory and handicapped education programs to compare how state governments and, specifically, state education agencies (SEAs) manage similar state and federal initiatives. The analysis treats the interaction between federal program characteristics and state-level variables; it addresses a set of policy issues that transcend individual programs and governmental levels, such as the capacity and willingness of states to serve "special needs" students and promising strategies for SEA management in a time of retrenchment and reduced federal direction. The research also provides a basis for assessing the probable effects of the most recent changes in federal education policy, particularly the ECIA.