An examination was made of the U.S. Department of Education grants awarded to the Cleveland School District for desegregation activities, including how Department of Education funds were used by the school district and how the department administered and monitored Magnet School grants awarded to the school district for fiscal years 1986 and 1987. Following an executive summary, this report has three chapters: (1) introduction; (2) amount and use of federal funds for desegregation activities; and (3) noncompliance with federal regulations for grant administration. The information indicates that the the district generally used the $30.2 million for purposes consistent with the desegregation court order. However, the district accumulated excessive federal cash balances, retained them for long periods, did not submit financial reports, and used a procurement system that did not satisfy documentation standards promulgated by the Department of Education. Appended are comments from the Department of Education and the Cleveland School District as well as five tables. (SI)