A Maryland sports foundation under investigation for allegedly misusing federal and state funds amassed nearly $460,000 in questionable expenditures over a 21-month period, according to a state audit released yesterday.

The expenditures include payments from the Maryland State Games Foundation Inc. to relatives of foundation members and employees of the state department it worked with, according to the auditor's report.

"Numerous expenditure transactions processed through the foundation were highly questionable, extravagant and/or unsubstantiated," state Legislative Auditor Anthony J. Verdecchia told leaders of a joint budget audit committee of the Maryland General Assembly in a letter accompanying the audit.

The audit report follows an announcement by the state Attorney General's Office last week that it had launched a criminal investigation into the financial dealings between the foundation and a sports program called the Maryland State Games, which was managed by the Department of Health and Mental Hygiene.

The foundation was established in 1989 to market and raise money for the annual State Games competition for amateur athletes from across the state. Maryland had hoped the foundation would help draw the U.S. Olympic Festival, considered a warm-up for national Olympic hopefuls, to the state sometime between the 1992 and 1996 Olympics.

The investigation into the foundation's activities became public soon after state Health Secretary Adele Wilzack dismissed John M. Staubitz Jr. from his post as deputy secretary for operations, and James Narron from his position as the director of special projects. Staubitz supervised Narron, who also was chairman of the State Games foundation.

Neither Staubitz nor Narron could be reached for comment.

Wilzack said yesterday she was "angry and upset" about the problems identified by the auditor. She declined to go into much detail about the department's management of the Maryland State Games program because of personnel regulations and her desire not to disrupt the attorney general's investigation. She said the program had been run by her deputy secretary and "it wouldn't be unusual if it {the program} did not come to my attention."

Before discussions of attracting the Olympic Festival began, Wilzak said department officials viewed the Maryland State Games as a positive activity to give youths an option for avoiding alcohol and illegal drugs.

Maryland Gov. William Donald Schaefer expressed confidence in Wilzack's actions at a news conference yesterday.

"My confidence in Adele is as strong as it ever was . . . . I think her intentions were honorable," Schaefer said. He said that contrary to comments from state legislators earlier this week, it was appropriate for the Health Department to run the State Games. The auditor's report recommended that future endeavors such as the State Games be administered by the Department of Economic and Employment Development.

Schaefer added, "If they knew what {Wilzack} was trying to do before they started jumping all over her, her intention was to bring something to the state that we never had before. I happen to promote that idea. We had an opportunity to bring thousands of people here, get national publicity and help the local economy."

According to the auditor's review of foundation records, the foundation received about $891,027 and spent about $750,000 in federal, state and private funds between Dec. 5, 1988, and Sept. 12, 1990. About $631,451 came from state and federal grants, and the organization ran up debts of at least $187,000.

Expenditures listed as questionable by the foundation include:Donations totaling $25,000 that were made to a local fencing academy that employed Narron's wife. Payments totaling $7,166 to rent two Ocean City, Md., condominium apartments, one of which was owned by a health department employee. Payments totaling $95,000 to a private corporation that was a sponsor of the 1990 World Table Tennis Tournament in Baltimore. Narron is a member of the corporation's board of directors. The purchase of two cars and a van from a Howard County automobile dealership in which the salesman was Staubitz's father. Financing a $3,020 scholarship for a niece of Staubitz's. The use of $12,856 worth of complimentary airplane tickets, some of which were used by Staubitz's sister and two nieces.

The legislative auditor recommended that state agencies no longer be allowed to award grants to organizations with which they are affiliated unless the actions are approved by the General Assembly.

The auditor also advised state officials to conduct a second audit to determine whether the foundation broke federal regulations governing the expenditures of federal grants. The auditor's report questioned whether the foundation properly spent about $460,000 in federal drug and alcohol abuse funds given to it by the health department.Staff writer Howard Schneider contributed to this report.