MONTEREY, VA. -- Here in Highland County, where the south branch of the Potomac River starts as a narrow creek tumbling down from the mountains, lie the headwaters of a political crisis that some predict is about to wash over Virginia's educational system. The consequences are large for everyone, from the children who fill the classrooms to the taxpayers who pay to put them there.

The problem is known in educational circles as "disparity" -- the wide, and critics say widening, gap between the haves and the have-nots among Virginia school districts. As elsewhere across the nation, Virginia is under increasing legal pressure to narrow the differences between the schooling provided in affluent suburbs such as Fairfax and Prince William counties and that offered in the state's rural satellites and ailing inner cities.

Per-pupil spending in Virginia ranges from a high of nearly $8,000 annually in Alexandria to a low of $3,300 in Poquoson, in Tidewater.

Examples of educational disparity abound across the state, but in few places is the issue highlighted so vividly as in Highland, a breathtakingly scenic county five hours southwest of Washington. Tourist brochures tout the area as "Virginia's Switzerland."

In a county of about 400 students -- roughly one per square mile -- Highland's school system is the smallest in the state. When the district started this school year with two dozen more students than expected, local supervisors refused to pay the extra $100,000 required under a state funding formula that combines local money -- primarily property taxes -- with state funds. In a dispute that has yet to be resolved, Highland's supervisors said that the state's formula is unfair and that local taxpayers couldn't afford their share.

Critics contend that the chasm between rich and poor makes Virginia's educational system vulnerable to the type of court challenges that have struck down funding systems in many states, including Texas, New Jersey, Wisconsin and California. Kentucky's Supreme Court decided last year that the disparity in that state was so severe that it declared the entire public school system unconstitutional.

Educational leaders say such rulings and the standoff in Highland have ensured that educational disparity in Virginia will be a dominant issue on the state government's agenda for some time to come -- at a potential cost of millions of dollars.

Gov. L. Douglas Wilder, who in his first address to the legislature earlier this year said that the issue has "far-reaching constitutional, moral and ethical implications," has formed a 24-member panel comprising government, educational and business officials, which is expected to produce proposals by early next year.

A coalition of school superintendents from Southwest Virginia is watching the governor's panel closely and has said that if progress is not made in alleviating disparity, it will consider suing the state.

"I'm not concerned about the {threat of} litigation so much as I am about the fairness," said S. John Davis, who retired this month after 11 years as Virginia's superintendent of public instruction. "Is it fair for a young person from one part of the state with one year of a foreign language to be competing against someone who's had six?"

In Northern Virginia, for example, students can take five years of such languages as Russian, Latin and German. In Highland, the only foreign language offered is Spanish.

Suzanne F. Thomas, chairman of the state Board of Education, recently recited for Wilder's panel, on which she serves, an array of statistics highlighting statewide disparities:Calculus is offered in 60 of the state's 133 school divisions. Advanced chemistry is offered in 32 school systems, and advanced physics in seven. About 17,000 students drop out statewide each year, but in some districts the rate is near zero, while in some urban ones such as Petersburg and rural ones such as Warren County the figure is nearly 11 percent.

At the heart of the disparity issue in Virginia are two factors, education experts say: wide differences in the ability of localities to raise money from their taxable real estate, and the state's elaborate formula to distribute state instructional dollars to the localities.

Since 1988 the state's funding formula has tried to redress disparities by funneling relatively more money to poor localities than rich ones by using a complicated scale that tries to measure wealth through indices such as property values, sales tax revenue and residents' gross incomes. Under the formula, the poorest school systems contribute a minimum of 20 percent of local dollars to their total education spending, while the richest can be required to contribute as much as 80 percent.

But critics such as the Virginia Education Association have commissioned studies that say the 1988 revisions have not worked and the spending gap has widened.

In Highland, for example, local lawmakers say the formula penalizes their county, where property values have been pushed up by an influx of part-time residents -- many from the Washington area -- who come to the mountains to build vacation or retirement houses. Under the state's formula, therefore, Highland is treated as a relatively well-off community and is expected to contribute about 60 percent of its total $2 million school budget.

Yet most of the county's 2,800 year-round residents receive their income from farming or various low-wage jobs, making it hard to raise taxes for schools.

"The people here are raising sheep and cattle on expensive property," said Highland Superintendent T.C. Dickerson III, who maintains that his school district does an impressive amount with the money it has. "They can only pay so much."

Disparities are exacerbated not just by differences in localities' ability to pay for schools but by residents' willingness to do so.

Voters in Fairfax County, for example, consistently have been willing to go into debt to build new schools. Dickerson said Highland voters would never pass a school construction bond, even though space at the county's one elementary school is so cramped that the guidance counselor works out of what used to be a janitor's closet.

It is especially in places where local interest in paying for top-quality schools isn't so strong that the state should play a greater role, said James Burns, a school superintendent in Southwest's Pulaski County.

"Is it fair to allow majority rule to disenfranchise the minority who want a good education?" Burns asked.

Disparity is a potentially explosive issue because solving the problem ultimately involves redistribution of wealth. Northern Virginia politicians and educators note that their region already sends far more tax dollars to Richmond then it gets back.

Nonetheless, downstate education advocates say they need even more support from the high-income suburbs. For example, state Sen. Dudley J. "Buzz" Emick Jr. (D-Botetourt) is pushing a variety of changes that would slash the state's education bureaucracy and scrap the Byzantine funding formula. Once these steps are taken, he said, "Absolutely, I'm going to tax the rich and give it to the damn poor."

Prince William County School Superintendent Edward L. Kelly said that Northern Virginia can help other areas, but that the state needs to ensure that those poorer areas are taxing themselves at a reasonable level, and not merely counting on state support.

Kelly also said the state must "raise the minimum foundation" of state-mandated school programs, but should not limit the ability of Northern Virginia schools to raise money for programs that go beyond the minimum.

In some places, including Colorado and Iowa, state governments have put limits on how much money local governments can raise to improve their schools above statewide standards, according to the Education Commission of the States, a nonprofit research group.

Political and educational leaders in Richmond don't find that an attractive approach for Virginia.

"The point is not to bring some people down, it's to bring everyone up," said James W. Dyke Jr., Wilder's education secretary.

Dyke said he is determined to level disparities, but he is considerably more optimistic than some critics. For example, he contends that Virginia is not at risk of having its entire school system overturned, as occurred in Kentucky, because the state has shown a willingness to address disparity on its own, without a court order.

And Dyke said disparity can be solved without ballooning the state budget. Although funding disparities may never be eliminated, he said, through innovative teaching techniques "we're trying to focus on programmatic equity."

An example of such innovation, he said, is televised classrooms in which students take classes via satellite. Such a program is in place in Highland County.

Madeline I. Wade, president of the Virginia Education Association, agreed that televised classrooms have a place, but said this kind of gadgetry "can never replace the things that a good teacher can provide." There is no easy way to end disparities, she said, short of higher academic standards and more spending statewide.

Moreover, Dyke is too sanguine if he thinks Virginia isn't in danger of a courtroom defeat, one education finance specialist said.

Kern Alexander, a Virginia Tech professor who advised the plaintiffs in the Kentucky case, said Virginia's disparities are just as stark.

The history of state legislatures nationally, he said, gives him little confidence that the Virginia General Assembly will have the political will to level disparities without court intervention.

Like Alexander, Pulaski County's Burns believes most political leaders, in Virginia and elsewhere, have yet to face the issue. "This is going to be an issue of the decade," Burns said. "Every state has got to come to grips with the question of whether you let the wealth of the community determine the quality of education for the child."