This study investigates three alternative methods in practice for operating and funding the Department of Defense (DOD) dependents' schools that are located in American military installations. Through the Military Construction Authorization Act of 1985, Congress indicated that federal maintenance and operation of dependents' schools was not an exclusive responsibility and might no longer be necessary. The General Accounting Office was directed to evaluate the following alternative practices: (1) the local operation, maintained by school districts on or off installations and funded by federal, state, and local governments; (2) the contract operation, which allows DOD to contract with local school districts and to assume funding; and (3) the coterminous operation, whereby dependents' schools operate as local school districts and funding is shared by the Department of Education and the responsible state government. The recommendation of the study is for the coterminous operation alternative. Chapter 1 of the report discusses funding methods and federal impact aid. Chapter 2 reviews the alternatives and offers recommendations. The coterminous operation is recommended because the federal government would net substantial savings, nine states would assume educational responsibility, and the states' annual funding would increase substantially. Chapter 3 analyzes legal restrictions, discusses the five installations where more than one local school district adjoins the installation, and lists desegregation plans. The document includes numerous tables and seven appendices. (CJH)