Prepared in response to Section 3602 of New York State Education Law, this report analyzes the relationship between approved operating expense (AOE) and instructional expense (IE) for 1990-91. Originally defined as a net aidable expense for dispensing operating aid to school districts, AOE's definition and use have been considerably modified over time. IE, an alternative direct institutional cost measure developed and defined in law in 1990, attempts to measure the direct instructional portion of a district's overall spending. The study concludes that AOE was created to reflect both instructional and noninstructional expenses not otherwise funded outside of operating aid. Since AOE is calculated by deducting certain expenses, its consistency can be dramatically affected by certain one-time, noninstructional deductions. IE accounted for 70 percent of total (unadjusted) expenditures statewide. Although IE and AOE were highly similar, the spending per pupil difference between IE and AOE increased with increasing district wealth. IE as a percent of total adjusted expenditure remained relatively flat as district size increased, whereas AOE generally increased with district size. When both IE and AOE were expressed as a percent of total adjusted expenditures, the AOE percent increased with district wealth. Preliminary evidence suggests that IE represents a useful measure of instructional cost. Included are a list of policy issues, a glossary, and appendices containing statutory definitions, regulations, methodology, and data tables. (MLH)