When Cathy Altoff was 2 months old she weighed less than five pounds. She had Down's syndrome and suffered from a chronic heart condition. Her father, an American diplomat, had tried to place Cathy for adoption with a dozen agencies, but none would accept her because she was not expected to live.

Today, after three operations and months in the hospital, Cathy Altoff is a plump, alert child, who might not be alive had it not been for the Children's Adoption Resource Exchange (CARE), according to Bill and Jackie Altoff of Reston, who adopted her through the small Northeast Washington agency three years ago.

But the agency credited with saving her life has not fared as well.

CARE, the only agency in the Washington area devoted primarily to finding homes for children considered "hard to place" because of age, race, physical or emotional handicaps, or because they are older or in groups of siblings, will go out of business soon unless it raises $20,000 by the end of January, agency officials say.

If the agency closes, handicapped children in foster care in this area will lose their primary advocate, and "nontraditional" parents, those who do not fit the standards of other agencies, will have great difficulty adopting children, said Gloria Swieringa, a CARE board member.

"You've got 60 million parents pounding on the door of other agencies for a healthy white baby," Swieringa said. "It's the kids with Down's syndrome, the kids with spina bifida a birth defect in which nerve endings at the base of the spine are incompletely developed , the quadriplegics, who really need an advocate."

An estimated 500,000 children in the U.S. are in foster care, according to CARE officials. A majority of them are "special-needs" or "hard-to-place" children, and about 60 percent of them are minorities. CARE placed 32 Washington area children and 25 from abroad in 1982, director Lorrie Fellon said.

CARE is in financial trouble, Sweiringa said, partly because of its commitment to finding permanent homes for hard-to-place children. Although the agency receives grants from private foundations, it relies primarily on adoption fees to cover its $3,500 monthly expenses.

But CARE often has waived or slashed the fees, which range from $800 to $1,600 for the initial step of the adoption process, for prospective parents who could not afford them, said Lorrie Fellon, the agency's sole employe.

"That's how we got into this predicament in the first place," Fellon said. "Usually people adopting special-needs kids are not wealthy folks. They are people with a lot of love and patience."

The monthly operating expenses include rent for CARE's row-house office at 1039 Evarts St. NE and the high cost of long-distance telephoning in trying to match parents and children across the country.

Unlike other adoption agencies, CARE does not have custody of the children it places. Instead, it evaluates prospective parents and seeks to match them with children in foster care. The agency that has custody of a child makes the final decision on placements recommended by CARE.

When Fellon took over last November, she said, she discovered the agency did not have enough money to pay her salary. She said the board has had little success in finding enough money to keep CARE alive.

Many states pay subsidies to parents adopting handicapped children, but that assistance has been reduced by cuts in federal social service allocations.

In addition, many state social services agencies are reducing the number of adoption workers they employ. As a result, Sweiringa said, more children may spend their lives in foster care, being moved around from one family to another, because no one has the time to collect information on them and pass it on to organizations such as CARE.

In the District, however, there has not been a decrease in staff or a reduction in services, according to Norma Jernigan, acting chief of child and family services of the Department of Human Services. She said the city is planning a slight increase in the $214 monthly subsidy it pays to families who have adopted children with special needs.

The Altoffs, and other parents who have adopted children through CARE, said they previously had had difficulty with other agencies. The Reston couple said they had tried for months to adopt a Down's syndrome child, but had been turned down by other agencies because they already had seven children, two of them adopted.

Glen and Cassandra Polston of Poolesville, Md., said they, too, were turned down by adoption agencies when they first sought a child, despite their willingness to take an older child or one with a handicap. Because he is white and she is black, they were able to adopt children with parents of different races, who are usually harder to place, through CARE. The agency has a policy of not placing black children with white couples.

"What got me was the regulations these agencies put on who could and could not adopt a child. Yet, they still have plenty of children in foster care," said Cassandra Polston, a Montgomery County police officer.

"We looked into one agency that would have cost us $15,000 to $20,000 once we did the home study . . . . We have two biological children. That ruled us out with a lot of agencies," she said.

The Polstons adopted 4-month-old Jacob last year and 3-month-old Rachel in July, both through CARE. Both are children of black and white parents. The Polstons have two children of their own, Christopher, 10, and Rebecca, 8.

"CARE comes from a place of real concern for the child," said Laurie Richards, a District woman who, with her husband, David, has adopted two Asian children. Fellon performed the initial interviews (called a "home study") for the Richards when they adopted their second daughter, Ahana Prya, an 18-month-old from India. Their eldest daughter, 5-year-old Ariani from Indonesia, is also adopted.

By seeking to adopt a handicapped child, Jackie Altoff said, "I thought I was taking this wonderful humanitarian step . . . . They said there was no way they would place a kid in a house with six others. They suggested I see a psychiatrist."

She said she first considered adopting a child with Down's syndrome when she saw children who had the condition in an infant stimulation class.

"They were so cute. My vision of a retarded person was like a vegetable. But these babies were developing. Some of them were on the appropriate level for their ages . So I started looking for a Down's baby," she said.

"We are considered a nontraditional agency," Fellon conceded. "One battle we took on this year was to convince agencies to place healthy children with single parents. We made some inroads. We got some agencies to consider it, but what happened in every case was the agencies accepted our home studies but placed the child with a two-parent family."

Fellon said she believes the difficulties for hard-to-place children and nontraditional adoptive children reflect "our society's prejudice about who the best parents and the best children are . . . . if you're single or a child who is handicapped or older, you're second-class."