The widespread use of testing to make critical individual decisions concerning education or employment opportunities, coupled with growing vigilance by the handicapped community, may mean increased legal scrutiny regarding this type of testing. The measurement community is also aware of difficult, perhaps unresolvable psychometric problems associated with testing handicapped persons. The past decade has seen new federal and state statutes designed to ensure handicapped persons' free and equal access to education, employment, and public services and to afford legal sanctions against inappropriate discrimination. This paper reviews legal issues concerning the testing of handicapped students and employees in schools and colleges. Part I summarizes the major specialized sources of applicable statutory and administrative law, focusing on two federal laws: (1) Section 504 of the Rehabilitation Act of 1973, which provides a wide definition of handicap and includes numerous testing requirements in education and employment settings; and (2) the Education of the Handicapped Act (1970), which provides extensive testing requirements and procedural safeguards specific to elementary and secondary school students. Part II synthesizes relevant case law. The largest cluster of testing cases has focused on alleged racial discrimination in special education placements. Regarding minimum competency testing requirements for receiving a high school diploma, three relevant court decisions held that this practice is neither unconstitutional nor a violation of federal legislation. Relatively few suits have progressed through the courts, and the proportion of successful plaintiffs has been relatively low. The only safe prediction is that similar lawsuits will be forthcoming. Included are 83 endnotes and an author abstract. (MLH)