The two issues examined were: (1) the use of urban population as an indicator of the prevalence of drug abuse, and (2) the impact of the 1984 hold harmless clause on the targeting of aid to those States with the greatest need. In researching these two issues, the GAO relied upon previous studies of the apportionment formula and the incidence of drug abuse. Their estimates of the incidence of drug abuse were used as criteria for evaluating the Alcohol and Drug Abuse and Mental Health Services (ADMS) formula's targeting of aid. The GAO found that, while the urban population factor is an appropriate indicator of the prevalence of drug use, its use in the apportionment formula overstates the magnitude of drug use in urban as compared to rural areas. Research indicates that urban incidence rates are somewhat less than 3 times higher than nonurban rates; the current formula produces a pattern of funding differences appropriate for a 15 to 1 differential. The GAO also found that the 1984 hold harmless clause prevents a more equitable distribution of funds based on available indicators or State needs regardless of use of the urban factor in the apportionment formula. 10 appendixes, 8 tables, 3 figures, 21 notes, 5 references