This report presents the findings of the New York State Comptroller's audit of the Education Department's management and oversight of the Preschool Handicapped Education Program. The audit notes a 68 percent increase (to $298 million) in costs during 1990-91 over the previous year, most of which is attributed to the 55 percent increase in the number of children enrolled. Other factors identified as contributing to rising costs included: broad definitions of certain handicapping conditions, especially "speech impaired"; too much subjectivity in the child evaluation process; too much use of the more expensive center-based programs rather than itinerant services; many local Committees on Preschool Special Education (CPSE) that do not possess adequate professional expertise and rely on parent-selected private evaluators (who are also often program providers); and the need for formal objectives and performance measures for the program. This report includes introductory material on the audit background, scope, objectives, methodology, and internal control; discussion of program design and implementation; consideration of the effectiveness of CPSEs; and conclusions regarding the effectiveness and cost of the program and individual providers. Two exhibits present: (1) a summary of children enrolled in the program by condition for 1989-90 through 1991-92; and (2) estimation of potential cost savings with increased use of itinerant services. Comments of Department officials are appended. (DB)