The states are Arizona, California, Colorado, Florida, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Maryland, Massachusetts, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, and South Carolina.

The competition rewards ambitious reforms aimed at improving struggling schools and closing the achievement gap. Dozens of states have passed new education policies to foster charter school growth and modify teachers evaluations, hoping to make themselves more attractive to the judges.

In a speech announcing the finalists at the National Press Club in Washington, D.C., Tuesday, Education Secretary Arne Duncan said a "quiet revolution" of education reform is taking place across the country.

"It's being driven by great educators and administrators who are challenging the defeatism and inertia that has trapped generations of children in second-rate schools," Duncan said.

Thirty-five states and the District of Columbia applied during the second round of the competition. Applications were screened by a panel of peer reviewers, and finalists will travel to Washington in coming weeks to present their proposals.

The department expects 10 to 15 applicants will ultimately receive money, depending on whether large or small states win.

"Just as in the first round, we're going to set a very high bar because we know that real and meaningful change will only come from doing hard work and setting high expectations," Duncan said.

All finalists scored higher than 400 points out of a possible 500 points in the initial evaluation. Duncan said the average score rose by 26 points between the first and second rounds.

In the past 18 months, 13 states have altered laws to foster the growth of charter schools, and 17 have reformed teacher evaluation systems to include student achievement, among other things.

Nearly 30 states have scrambled to adopt the Common Core State Standards, a state-led initiative that outlines what students should know by the time they graduate from high school, which is part of the scoring for Race to the Top.

New York, a finalist in the first round that did not win money, lifted its cap on the number of charter schools that can open from 200 to 460. Colorado passed laws that would pay teachers based on student performance and can strip tenure from low-performing instructors.

Georgia, a current finalist, didn't change any laws but already had one of the most open charter policies in the country. Gov. Sonny Perdue was unsuccessful in getting performance pay for teachers passed, but lawmakers have agreed to form a study committee on the issue.

"While some have called this federal intrusion into state education policy, the goals of Race to the Top are well aligned to the direction Georgia is moving," said Perdue, a Republican.

Two states, Tennessee and Delaware, were awarded a total of $600 million in the first round.

Their applications were praised for merit pay policies that link teacher pay to student performance and for garnering the support of teachers unions. Tennessee and Delaware also have laws that are welcoming to charter schools.

All the states that were finalists but did not win in the first round were finalists in the second round.

"Our performance in round one was a pretty strong hint that we would be a factor in round two," said South Carolina State Superintendent of Education Jim Rex. "South Carolina is viewed as being on the cutting edge of making the changes that will make schools stronger."

In Washington state, an applicant that was not named a finalist, state officials said they would continue ongoing education reform.

"We were committed, win or lose, to making sure we would carry out education reform our way, the Washington way," Gov. Chris Gregoire and Superintendent of Public Instruction Randy Dorn said in a joint statement.

Mike Petrilli, vice president for national programs and policy at the Thomas B. Fordham Institute, an education think-tank, said the finalists included states such as Maryland and Ohio that he called "very lukewarm on education reform."

Duncan disagreed, saying Maryland and Ohio had strong applications.